Two new companies are quickly becoming household names: Uber and Airbnb. Though both provide services – transportation and lodging, respectively – that have been mainstays in the economy for many years, each has managed to leverage the Internet to provide these services in a unique way. The Pennsylvania Institute of Certified Public Accountants (PICPA) offers the following considerations when using or providing these services.
Uber, simply put, is a nontraditional taxi service through which consumers arrange rides through a computer/smartphone app and payment is handled online. The drivers are not really employees, but contractors. They use their own cars and drive when they prefer. Passengers can see the progress of the incoming ride through their app and get a ride quickly.
Airbnb is an Internet-based lodging service in which homeowners/hosts list their own lodgings as available for rent, and potential guests can book an available home or room. Airbnb collects service fees for bookings. For the lodger, prices and pictures of the accommodations can be reviewed online for many different destinations; for the homeowner, Airbnb provides a chance to generate income by using this platform to rent out a room or a home when available.
Those who have not dealt with these two businesses can see the potential red flags. Regarding Uber, if I am a driver, will the passenger I am picking up be safe? On the other side of the transaction, will the Uber driver be trustworthy or harm me as a passenger?
Regarding Airbnb, the most logical question for the host is will my home be vandalized or misused? For the guests, there may be a nagging uncertainty that you know nothing about the people with whom you will be staying.
Hesitation is only natural. All parties to any new business relationship should keep caution in mind. Let’s face it, not that long ago many Internet users were reluctant to put in credit card numbers to make online purchases until they felt it was secure.
With that in mind, here are some best practices when dealing with new technology/experiences:
- Acquire as much information as possible related to the experience/transaction before becoming invested. Do your research.
- Put your foot in the water before going in completely. Test the experience/transaction. This could mean renting your house just for the weekend before considering longer rentals, or taking an Uber ride from your house to a short destination.
- Gather advice from friends, family, and neighbors about any experiences they may have had with these two companies.
Financial/Tax Considerations for Service Providers
For existing or potential service providers, it is always a good idea to discuss financial and tax considerations in more detail with a CPA. This section merely provides some basics.
With Uber, a service provider is not an employee but an independent contractor. That means the driver is running his or her own business. So when the service provider gets paid by Uber, no income taxes, Social Security taxes, or Medicare taxes will be withheld. For federal income taxes, that means the service provider will report both income and expense deductions on his or her personal tax return (generally Schedule C). Also, the tax return will determine the Social Security and Medicare taxes that also need to be paid via federal schedule SE for Self-Employment Tax computation. The good news is that “ordinary and necessary” business expenses may be deducted against income, which will lower taxes. Some expenses that could be deductible would be depreciation on the car (if owned, or lease payments if a leased vehicle), tolls, gas, oil, etc. -- but only those based on the actual business use! Because no taxes will be withheld from payments from Uber, quarterly tax payments will need to made to the IRS. Beyond the federal tax implications, there will be state and possibly local tax implications including requirements for additional estimated payments. If service is provided across state lines, this could expand state filing requirements to include the additional state or states.
With Airbnb, the financial considerations are a bit more complicated. Airbnb has a document online prepared by the CPA firm Ernst and Young (EY) that covers in detail the tax implications of rental property. A major tax consideration includes whether the property being rented is used as a home, used partially as a home and rental property, or used exclusively as rental property. One great federal tax break is if a dwelling is considered a home, it can be rented out for 14 days or less and there is no tax on the rental income (it does not need to be reported). With rental property, where income is reportable, expenses can be deducted such as house cleaning, utilities, etc. The profit that is earned on rental property is reported on a Schedule E. If property is used by both the owner and guests, expenses related to the business will need to be prorated. Note that the tax consequences are far from simple. If rented (and reportable), there will be future taxable gain repercussions down the road as the individual gain exclusion is limited when the property has been used for a business purpose.
Uber and Airbnb are examples of businesses in what is now commonly referred to as a disruptive economy. There are many new opportunities to earn an income. While it may not seem like it to some, becoming a service provider for these new services has many similar business and tax ramifications to being a small business entrepreneur. Be sure you know and understand all the financial ramifications and plan accordingly. A CPA can help.
If you don’t currently have a CPA visit www.picpa.org/moneyandlife
to access the free CPA locator tool, which allows you to search for a professional by location and area of expertise.
Originally published March 21, 2016