In recent years, there has been a new “minimalist” movement as millennials begin to enter their 30’s. In prior years, the ultimate mark of the middle class was owning “stuff” and showing it off. However, with the environmentally conscious millennial generation, owning two or three cars can be seen as wasteful.
Rather than have shelves and shelves of books, records, or movies, all of the same information can be stored on a small thumb drive. Cutting down to one or no cars and using services like Uber or Lyft have become popular. When taking a vacation, instead of staying at an expensive resort, renting a room at a house with Airbnb is common for many younger travelers.
Ridesharing, condo/home lending, peer-to-peer lending, talent-sharing, reselling, and co-working are all niches being filled in the new sharing economy. In the near future, we all may own much less “stuff” and share much more. This move to less is more is due to the ability to store and use big data.
How Data is Changing the Economy
Most of the sharing economy would not be possible without leveraging a platform and the foundation of big data. Companies like Uber and Airbnb have developed their own platforms where users and providers connect. There are many other companies that have taken the idea of using a platform to allow people to connect in order to make money.
Without the use of large amounts of data and algorithms used to drive these platforms, these companies would not be competitive with their older, consumer driven counterparts. Sophisticated apps allow users to easily navigate a large amount of data and match them to providers for each of these services.
These companies are rarely the provider of services. Rather, they are the facilitator that makes the transaction possible, safe, and easy for both the provider and user. Many providers are people who have full-time jobs and are using these platforms to earn some extra cash. If you are one of these people, the money earned may be taxable. Whether it is a one-time event or a lucrative part-time job, the cash or money earned is taxable according to the IRS.
Even if cash is not earned, but something of value is received in exchange for a service, there is still tax owned on the transaction. The IRS has wasted no time in developing a tax structure of this growing sharing economy. Recently issued by the IRS, the Tax Tip 2017-39 addresses the taxes due in a sharing economy.
The good news is that there may be deductions allowable for this income which can reduce the amount of tax owed on the income. Since deductions from expenses related to renting a home or using a car as a taxi can be confusing and complicated. Therefore, it is advisable to get familiar with the Tips from the IRS on paying taxes in the new sharing economy.
The IRS and Tax Tips in a Sharing Economy
The IRS now offers a website dedicated to the sharing economy. At the Sharing Economy Tax Center, taxpayers can find the resources needed to help them correctly report and meet their tax obligations from a sharing economy. Some helpful tips on this site include:
- Taxes – The activity in a sharing economy is taxable. Whether a part-time business or a full-time endeavor, if payments received are in cash, then the activity is taxable.
- Deductions – For those who use their car for a business, there are some simplified options pertaining to deductions. For example, a common business expense for Uber drivers is to claim standard mileage. In 2016, the standard mileage rate was 54 cents per mile.
- Rentals – If a home, apartment, condo, or room is rented out by a homeowner, special rules will apply to the money earned. Publication 527 entitled Residential Rental Property, informs providers with the rules pertaining to this type of income.
- Estimated Payments – In order not to get behind or suffer tax penalties, taxpayers in the sharing economy need to estimate tax payments during the year. Due on April 15, June 15, September 15, and January 15, Form 1040-ES allows providers to pay their estimated tax to the IRS.
- Payment Options – Fast and easy are not words normally linked to the IRS. However, when submitting estimated tax payments, the IRS has created a Direct Pay link that allows providers to pay their estimated tax payment quickly and easily. The Treasury Department also has an Electronic Federal Tax Payment System (EFTPS).
- Withholding – If filling out forms and remembering to submit payments once a quarter does not sound appealing, those who are working a full-time job can have more tax taken from their paychecks by filing Form W-4 with their current employer.
Beginning in 2017, if taxpayers use a software package to submit their tax returns, they may need their Adjusted Gross Income (AGI) from the previous years’ tax return for identity verification when submitting their taxes.
Some Popular Sharing Markets
If a person is interested in diving into the new sharing economy, there are many new markets in which to explore.
- Freelancing – Writers, graphic designers, coders, and other freelancers can connect with business owners who are looking to hire. Sites like Textbroker, TaskRabbit, and Care.com, connect business owners with those willing to work in these fields. Their platforms help connect service providers with potential customers.
- Co-working – The ability to rent a single desk or office space without the costly overhead of renting an entire building or suite allows entrepreneurs to cut costs. WeWork is an example of one of the many companies that provide this service.
- Car sharing – Perhaps the most popular and known sharing market, services such as Uber and Lyft allow individual drivers to use their personal vehicles as a taxi. Zipcar has emerged as a leading car borrowing service. Liquid provides bicycle rentals.
- Peer-to-Peer lending – For those who want their money to work for them, Lending Club links people who are willing to lend money to one another. Solid returns on investments and lower, competitive interest rates are helping many bypass the bank or credit card companies.
- Fashion – With sites like threadUP, individuals can sell their clothing like an online consignment shop. Le Tote and Rent the Runway allows the flexibility to change wardrobes by renting designer fashions.