If you participate in the sharing economy by working as a 1099 contractor or by renting your home on Airbnb, you know that you will likely be required to pay taxes on your income. But just how much do you need to save in order to cover your tax payments? Here is a brief guide to help you determine how much to put aside for Airbnb and 1099 contractor taxes.
1099 Contractors
In most cases, sharing economy workers are considered as 1099 contractors for tax purposes. The only way you would not be considered as a 1099 contractor is if you have formed a corporation for your business. If you are a 1099 contractor, you will be considered as self-employed and you will need to pay self-employment tax if your net income is greater than $400.
You will need to save a significant amount of your income given that self-employment taxes total 15.3%. For income taxes, your income tax bracket will determine what percentage you should save for income tax. For example, if you earn $15,000 from working as a 1099 contractor and you file as a single, non-married individual, you should expect to put aside 30-35% of your income for taxes. It is important that you put aside money because you may also be required to pay quarterly estimated taxes.
Homesharing / Airbnb
If you rent on Airbnb, you will need to determine if your Airbnb income is taxable first. The amount of taxes that you will owe will depend on how long you rent your place. If you rent for less than 15 days per year and use your property as a personal residence for the greater of 14 days or 10% of the total time that you rent it out on Airbnb, you do not have to pay any taxes on your rental income.
However, if you rent for more than 15 days per year, you then need to make sure that you have put aside money for income tax, if you do not meet the above criteria for tax-free rental income. As a rule, Airbnb withholds 28% of your income for taxes if you do not provide them with a W-9 form. Although your effective tax rate will likely be lower than 28% this is a good rule to follow in order to make sure that you are covered.
Additionally, you may also be liable for state and local taxes related to your rental income. If your jurisdiction requires that you pay Transient Occupancy Taxes (TOT), Airbnb will automatically deduct and remit the payment of TOT on your behalf. While you do not have to put aside more of your earnings to cover these taxes, you should just be aware that this money will be taken from your earnings upfront.
How to Estimate How Much Tax You Might Owe
To estimate how much income tax you might owe, you can use safe harbor rule. The safe harbor rule is a method that is designed to help you avoid the IRS penalties that can result from underpaying your taxes. Since the IRS employs a “pay as you go” system for paying your taxes, miscalculating the amount of taxes that you owe could result in a current-year tax underpayment and subsequent penalties.
In general, the safe harbor rule can be calculated by taking 100% of the tax shown on your 2015 return and splitting it into 4 payments. You can also annualize your estimated 1099 contractor or Airbnb income and deductions for the year.
You must also determine what state, county, and city taxes you might owe. Once all of these factors have been considered, the taxes may add up to 30% to 50% of your income once you include federal and state income taxes, along with self-employment taxes.
Is there a better time to save thousands in taxes?
Shared Economy Tax was fast to respond, simple to work with, and gave me confidence in a complicated tax situation. I’m looking forward to working with them again this coming year!
Jason – Airbnb Host & Chief Technology Officer, Tierra Verde, FL
If i do a 4000 paint contract in Hamilton Twp, New Jersey as a contractor how much tax must I charge the client
Hi John, Thanks for reaching out. While we can only advise clients in the confidence of a 1-on-1 consultation, we do recommend saving between 20-40% of net operating profit. That means calculating your earnings less deductions and saving the 20-40% from there. that amount is what you will owe the federal government in income taxes. Whether you bill that to your client or pay it out of pocket is up to you. We’d be happy to connect in more detail if you have further questions.
If I get paid $3,200 a month, how much do I save for a 1099 misc form?
Hi Chaz, it depends. How much in deductions do you have? Generally I recommend using the following formula: (1099 income – deductions) * 40% = roughly estimated tax liability. I’m making many assumptions with this formula so check with your pro for more details.
Hello. I just got a job where I am a 1099 employee. I’ve heard that I should open an LLC but also heard something about an S Corp. I don’t quite know the difference. Is this something I should look into?
Hello,
I made $2,866.50 from one graphic design contracted job this year (2018) that was 1099. I would like help to get an estimate on how much tax I should save from that one job. I live and will file in California. I also have a full time graphic design job, this contracted project was just a on off job this year. I file single and have no dependents.
We would advise saving 40% of your net profits after deductions. That would be a very rough approach, what we call using a hatchet. A more refined way would be to actually collect your deductions and offset them from your contracted job and then assess the self-employment and federal income taxes on that amount, or the scalpel approach.
Hi Derek – great question – for that kind of feedback, we’d love to connect you to a tax pro. Get connected above and we can chat about how we advise on that.
Very best,
Miguel
Managing Partner
If i do less than $3,000.00 a year and have gone to the IRS office and asked in years before, and told that I owe nothing how much will I owe this year???
I’ve been offered a job as a sub-contractor being paid with a 1099 form I have no idea what taxes I will have have to pay. What percentage of my pay should I set aside to cover all taxes that I will have to pay
It’s hard to say with the information provided. It could be that you don’t owe, but we’d recommend filing your tax returns to establish a paper trail and start the statute of limitation for IRS review. If you don’t file, the IRS can go back as many years as returns that you have not filed. If you filed, then the statute of limitation is 4 years.
We recommend 40% after deductions, as a general recommendation.
I have been offered a position on a 1099 and could possibly make up to $85,000. Would I be required to submit quarterly to the IRS or jsut save around 35% for when I do my annual income tax return.
At that level, you would likely owe over $1,000 in annual tax and therefore would be required to make a payment.
I run Air BnB rental property in Long Island City, New York. I made about $35,000 for 2019 and paid $5300 per month on rent, also bought furniture, cleaning supplies, paid maintenance, all with a total of about $21,000 excluding rent paid to the landlord. Will I owe IRS or will I be getting a refund from my expenses? Thank you for your time.
Hey Mike,
I’d love to tell you exactly but that is going to depend on your other earnings and withholdings, for example, from your W2 / salaried work. By the looks of it, your Airbnb had a loss in 2019, is that correct? Typically, if you have a loss AND file your Airbnb business on a Schedule C (that is, as an active trade or business), you will typically owe *less* than you would have without the business. However, that does NOT mean you won’t owe taxes since you may have under withheld on your W2 job, or had capital gains from what’s been an amazing year on the stock market … If you have more questions, please reach out to Sean on our team (Sean@sharedeconomycpa.com), who handles client education and on-boarding. Of course, we can’t advise you outside of an engagement but hopefully this information points you in the right direction.
Best regards,
Miguel