Renting a spare room to backpackers or slapping a mustache on your car and transporting bar-hoppers seems like an easy way to make money - until tax season rolls around.
Some people who participate in the sharing economy find this out the hard way, when they get an unfamiliar 1099 form and realize they have to file new schedules with their tax return and pay a cut to Uncle Sam.
The sharing economy - also called collaborative consumption - lets individuals sell, rent or barter a product, space or service using apps or a website. Standing between them and their customers is a company that typically provides payment processing, marketing, a rating or review system and in some cases, liability insurance.
The nascent industry includes Bay Area companies such as Airbnb (home, room or couch rentals); Uber and Lyft (ride-sharing); TaskRabbit and Gigwalk (errand and odds jobs); and Prosper and Lending Club (peer-to-peer lending).
People who make money using these platforms generally do not have taxes withheld from their payments. Depending on how much they earn, they might or might not get a Form 1099 showing their receipts. This form also goes to the IRS. Even if they don't get a 1099, they are supposed to report all income on their tax return, unless it is specifically exempted.
"For the most part, people are ignorant that they even have to pay taxes" on money earned through the sharing economy, says Alberto Escarlate, a partner with theCollaborative Fund, which backs such companies.
Seeking guidance
His firm was getting so many questions about sharing-economy taxes it started a website - 1099.is - to answer some.
The answers are sometimes confusing. Not all companies - even direct competitors - report payments the same way. And because the industry is so new, even accountants are sometimes stumped.
"The tax side was a real pain in the butt," says Alex Stack, who loaned money through Prosper in its early days. "For years I could do (taxes) myself with a 1040EZ. Then I had to get an accountant. Even he couldn't figure out what they were doing."
People who lend money through Prosper are actually purchasing securities that give them the right to principal and interest on a loan or piece of a loan.
Annual statements
After the end of each year, they get a package that might include a 1099-OID (for interest on notes), 1099-B (for notes that were charged off and recoveries of previously charged-off notes) and 1099-MISC (for late fees, bonuses and referral awards).
They also get an annual statement, which is not sent to the IRS, that details their account activity. "That statement could be 50 pages if they bought a whole bunch of loans," saysAaron Vermut, president of Prosper.
Lending Club sends a similar package to investors, but unlike Prosper, it does not include charge-offs on Form 1099-B.
Vermut says taxes have not been a problem for most Prosper investors. "This is an early adopter product, up to now they have been relatively sophisticated," he says.
If you rent out your personal residence for 14 days or less, you do not have to report the income. If you rent it out for more, get ready for some paperwork.
Airbnb issues Form 1099-K to people - called hosts - who rent out homes using its platform.
This form is only a few years old; it was created to unearth income that was not being reported to the IRS.
3rd-party networks
Individuals, businesses and other entities receive a 1099-K because they have either:
-- Received payments via debit or credit card for any amount, or
-- Received payments through a third-party network for more than 200 transactions that totaled more than $20,000 in a year.
"A third-party network is an intermediary that facilitates cash flows between private or commercial parties doing business," says Jerri Langer of the Cokala Tax Group.
PayPal is an example of a third-party network.
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