At Shared Economy CPA, we’ve had the opportunity to help hundreds of Homeshare Hosts with their taxes and finances. One question that we often here is “As a Host, do I need to pay quarterly taxes?” For these reasons alone, we hope to help you answer this questions.
Although working in the Sharing Economy may feel the same as earning a salary because of your bi-weekly paycheck, many Airbnb hosts are considered to be self-employed. As an Airbnb host, no taxes have been withheld from your Airbnb payments, which means you are personally responsible for paying the full 15.3% (12.4% Social Security and 2.9% Medicare) self-employment tax on your annual income, if your rental income is not considered as passive income.
If your rental income is active, you will instead report your earnings from Airbnb on Schedule E CForm 1040). As a self-employed individual, if you are expecting to owe more than $1,000 in taxes on your Airbnb income, you are required to pay quarterly estimated payments on those earnings. Simply paying a lump sum at the end of the year will result in tax penalties.
Determining the amount of estimated payments you are required to make can be tricky. The safest way to avoid owing underpayment penalties at the end of the year is to make estimated payments that add up to 100% of your prior year’s tax liability. If you expect to earn significantly less in the current year than you did last year, the least you can pay while avoiding penalty is 90% of the current year’s tax liability, but predicting what your current year’s tax liability will be requires careful planning and knowledge of eligible deductions.
If your previous year’s adjusted gross income (AGI) is greater than $150,000 ($75,000 for singles), then estimated payments must be equal to 110% of the previous year’s tax liability (27.5%/quarter) in order to be in the clear. TurboTax software can do the calculations for you, or get a copy of the worksheet accompanying Form 1040-ES and work through that. Looking at your prior year’s tax return and noting all the deductions taken is also important to making sure you’re on track.
Although taxes seem difficult to minimize, there are some valuable deductions and strategic maneuvers that Airbnb hosts can use. Mortgage interest, property tax, insurance, operating expenses, depreciation, maintenance and repairs are just the tip of the iceberg for potential deductions. Understanding how to the tax codes work or hiring an experienced CPA can help you save lots of money and heartache over your thinning wallet.
Now that you have a better idea about whether or not you owe estimated tax payments and how to calculate these payments, the final step is getting them to the IRS on time! For income received Jan. 1st through Mar. 31st, estimated tax is due April 15th. Tax on income from April 1st to May 31st is due June 15th. Income received June 1st through August 31st is collected on Sept. 1st and finally estimated tax on income received Sept. 1st through Dec. 31st is due Jan. 15th of the following year. Remember: April 15th, June 15th, September 15th, and January 15th (or the next business day, if any of these dates fall on a Saturday, Sunday or federal holiday).
For more tax advice on your Sharing Economy tax liabilities, call Shared Economy CPA at (949) 329-5087, or log onto their website at http://www.sharedeconomycpa.com/ for more information and testimonials from several happy clients.