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.
Most sharing economy workers are 1099 contractors for tax purposes. However, you can avoid 1099 contractor status if you formed a corporation for your business. The IRS taxes 1099 contractors as self-employed. If you made more than $400, you need to pay self-employment tax.
Self-employment taxes total roughly 15.3%, which includes Medicare and Social Security taxes. Your income tax bracket determines how much 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. Putting aside money is important because you may need it to pay estimated taxes quarterly.
The key thing to note for independent contractors is that self-employment taxes are assessed on net income, not gross. So you’ll need to calculate your net income by subtracting deductions from your gross earnings.
Homesharing / Airbnb
First, Airbnb hosts should determine if their rental income is taxable. The amount of taxes you owe depends on how many days you rent your place. Do you rent for less than 15 days per year? Do you reside in your property for more than 10% of the total time you rent it or 14 days, whichever is greater? If so, you don’t 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. 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%, it helps ensure you have enough to cover taxes.
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 Calculate Estimated Tax Payments
To estimate how much income tax you might owe, you can use the 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 last filed tax return and splitting it into 4 payments. This doesn’t mean that you’re fully paid up on taxes, only that you won’t get penalized.
If you select the safe harbor rule and you owe more in taxes than you paid the prior year (for example if your business did better than the previous year), you will still need to make payments before April 15. You can also annualize your estimated 1099 contractor or Airbnb income and deductions for the year in order to calculate your estimated taxable income.
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 40% of your income once you include federal and state income taxes, along with self-employment taxes.
To see how we estimate tax liability for 1099 contactors, watch our Webinar excerpt below.
Where to Mail Quarterly Tax Payments
After you determine what you owe, you need to send it to Uncle Sam. You can do this electronically or via mail. Through mail, you can send a check or money order to the IRS. You also need to include quarterly tax forms, like form 1040-ES. The sending address changes depending on where you live, so you need to check out the instructions on IRS Form 1040-ES. They’ll tell you exactly where to send your quarterly tax payments.
You can find form 1040-ES here.
When Are Taxes Due?
You need to send in your estimated tax payments four times per year.
April 15th is tax day, but it’s also the due date for first-quarter taxes. You need to pay income for income earned in January, February, and March by April 15th.
Second-quarter taxes need to be paid by June 17th. Your payment should cover income from April and May.
Estimated tax payments for income from June, July, and August are due on September 16th.
This is the biggest payment of the year. It includes four months: September, October, November, and December.
Quarterly taxes don’t apply to everyone. However, if you owe, you need to pay or you’re risking consequences. Make sure you have all of your ducks in a row before these deadlines.
Get Help With Quarterly Taxes
Having difficulty with quarterly taxes? Don’t go it alone. Shared Economy Tax can help you figure out your estimated tax payments and more. Drop us a line today and let’s get started!