We’re not lawyers, so we can’t give legal advice. However, we can help you understand the tax implications that come with incorporating your Airbnb business. Organizing your home-sharing business into an LLC or corporation protects you from lawsuits and potential damages. If you organize your business into a formal entity, your personal assets are protected if your company gets sued. Business owners have many organization options, but corporations and LLCs are the most common.
Why Form a Corporation?
Some business owners prefer S corporations because they are pass-through entities. All S-Corp income flows through into the tax filings of its owners. On the other hand, C-Corps have to pay separate taxes on earned income and taxes on shareholder distribution. Since income is taxed on the way in and the way out, it’s sometimes called double-taxation.
S-Corporation owners can also hire themselves as employees. Owners can pay themselves a ‘reasonable’ salary, on which they’re still on the hook for payroll taxes. Any additional profits go to distributions and taxed at a lower rate. A ‘reasonable’ salary is determined by several factors, including the average salary in the field, and comparable salary data for similar roles and industries.
On the downside, S-Corporations are complicated. They require lots of complicated paperwork. If you choose to organize into an S-Corp, you might have to file all these forms and more:
- Form 1120S
- Schedule K-1 (which attached to your Form 1040)
- U.S. Individual Income Tax Return, Form 1040
- Form 941 and 940 (for payroll)
- Schedule E (Form 1040), Supplemental Income and Loss
- Form 1040-ES, Estimated Tax for Individuals
Other S-Corp requirements vary state by state. Read this helpful article to learn how to file taxes if you’re incorporated.
Why Form an LLC?
Limited-liability companies are great options for your many Airbnb businesses. They are much simpler to form and maintain than S-Corps. Plus, significantly less time goes into tax prep if you are a single-member LLC. LLCs offer the same liability protection as corporations, and they’re also pass-through entities, like S-Corps. They have the same tax treatments as an S Corps, without the complicated paperwork.
LLC vs. S-Corp
What are the main tax differences between an LLC and an S-Corp? Depending on their income, S-Corps might pay fewer taxes than LLCs. All LLC income is subject to payroll taxes, but S-Corporations only pay medicare and social security taxes on the designated compensation of the owner. These taxes total about 15.3%, but S-Corps don’t have to pay them on all of their income. By Paying yourself a portion of your revenue as a reasonable salary, you can avoid taxes on the rest of your revenues.
LLC owners only need to file taxes once per year on April 15th. For a single-member LLC, taxpayers must file Form-1040 and Schedule-C. These are the same requirements as a sole-proprietor business.
Personal Liability for Business Debts
However, corporations and LLCs can still be held liable in some rare instances. If you’re legally negligent, you could be liable for legal damages. Courts have the option to “pierce the corporate veil” and disregard an organization’s liability protection.
If the veil is pierced, the owners of an Airbnb business can be held personally liable for the debt of the company. Closely held companies are generally more susceptible to losing their limited liability status. If you want to protect your personal assets, it’s important that you comply with organization rules that come with LLC or corporation status.
Make sure you can invest enough into your LLC or corporation to ensure it has enough capital to be considered as a separate entity. Don’t commingle personal assets with the LLC or corporation. Don’t ever use a corporation or LLC to engage in fraudulent, illegal or negligent activities.
Business Deductions to Help You Save on Your Taxes
Ultimately, organizing your Airbnb business can help you to save on your taxes. You also might want to consider depreciation methods that could lower your tax bill further. Then, you can see how much of your business costs you can deduct. Business start-up costs include:
- Costs associated with starting an active trade or business
- Expenses associated with investigating the creation or acquisition of an active trade or business
Some of the costs of forming a corporation may also be deductible, such as the costs to hire lawyer, accountant or tax professional. These costs have to be amortized to be deducted.
Overall, an LLC or corporation offers a viable way to protect your personal assets when you operate an Airbnb rental business. However, make sure that you also check the start-up rules for your state as the filing and reporting requirements vary from state to state.