Everything You Need to Know When Doing Your AirBnB Taxes
Airbnb can be a great way to bring in extra cash, along with other home-sharing companies like VRBO and HomeAway. You might list your home when you travel, rent out a private room or even operate a second property as a vacation rental on Airbnb.
However, it’s important to remember that running an Airbnb is a business venture, so there are also tax responsibilities that come with renting out your home on one of these sites.
By keeping some key tax advice on hand and having your documents ready, you can help to save on your taxes, even as you build your Airbnb business.
Schedule C or Schedule E?
Let’s start with some basics. If you rent out your property for more than 14 days, you need to report the income you earned. You have two options of how to report this income to the IRS – either on a Schedule C or Schedule E. The good news is that you can deduct rental expenses on either of these schedules. For Schedule C however, any income you report would be subject to self-employment tax.
If you already freelance elsewhere or run a business of your own, you may be familiar with self-employment taxes. If you do not, however, this may be new to you.
When you run your own business or work as an independent contractor, you will have to pay both income taxes and self-employment taxes.
Self-employment taxes come in addition to income taxes. This is because you are responsible for paying your Social Security and Medicare taxes, as these aren’t automatically deducted by a business that is overseeing your payment. You will need to pay these taxes when you bring in more than $400 each year.
For 2020, self-employment has an Airbnb tax rate of 15.3% for the first 92.35% of your income from self-employment.
So how do you know whether to report your AirBnb income on a Schedule E or Schedule C? Basically it depends on whether or not you are considered a real estate professional. If you are providing substantial services and operating your rental property similar to a hotel, then you are considered by the IRS to be running your own business and must file a Schedule C (and pay those dreaded Self-Employment taxes). If renting out your property is more of a part-time and passive pursuit, you’re in luck and you can avoid the Self-Employment taxes by filing a Schedule E instead.
14-day Reporting Exemption
If you only rent out your Airbnb on a very part-time basis, such as during your family vacation, you should know about the 14-day rule, which says:
- You do not need to pay Airbnb tax on the money you make on a short-term rental, so long as you rent out your property for 14 days or less during the year you will not owe any taxes to the federal or state government
- This is only applicable if you yourself use the property for at least 14 days in the year
- This rule also applies to renting out a room in your house – if you do so for less than 14 days in a year, you do not need to pay taxes or even mention it on your income taxes.
Keep in mind that if you do not report your Airbnb income of under 14 days overall, you also cannot deduct business expenses for operating your Airbnb.
However, if you itemize your deductions overall, you can still take your normal mortgage and property tax deductions for the property.
Do note that Airbnb may still report the income to the IRS or issue a tax form related to the rental. If the IRS has questions about whether you have fully paid your Airbnb tax, you can show that you only rented the property for less than 14 days and resolve the issue quickly.
Keep Your Records In Good Order
It’s important to keep good records, especially if you take on your Airbnb rental as a year-round business.
You’ll have plenty of business expenses along with your income, and documenting those can help to reduce your tax liability.
For example, you can allocate the deductions for mortgage and property taxes between your rental business and your home, deducting on Schedule E for the business expenses and Schedule A for an itemized personal deduction.
Keep your records in good order in order to make sure that you are ready to show what you spent and how much you made renting out your property. Hold on to your receipts and invoices for expenses associated with your Airbnb.
You can deduct all of your ordinary and necessary business expenses from any taxes you pay on your Airbnb rentals, including things like:
- Food and treats for your guests
- Maintenance costs to repair or refurbish your rental room
- Cleaning services
- The price of goods that you buy for the room
Keeping your records organized in advance can prevent you from scrambling at tax time to figure out everything you spent to make your Airbnb a success.
Airbnb Service Fees are Business Expenses
You may receive a 1099 form from Airbnb and any other platform that you use to rent your property. You can use the data on that form to calculate your income and self-employment taxes.
Note that you must fill out a W-9 form when you first start acting as an Airbnb host. If you do not do so, the company will need to withhold 28% of your income in taxes. In almost all cases, you will pay far less in taxes than 28% if you handle them yourself on your income tax return.
When you check your online documents with Airbnb, the amounts included will reflect the income taken in before service fees and other platform expenses are deducted.
In other words, they will be greater than the income you received in your bank account because these fees are debited directly by the provider. You can deduct 100% of those costs as business expenses since you only have these costs in order to operate your rental property.
Other Taxes Associated with Airbnb
You may have to deal with another type of Airbnb tax rate: occupancy taxes. Depending on the municipal or state government of the location of your property, these can be added on to the self-employment taxes you are required to pay.
This tax is similar to that of hotel taxes and fees, for operating a short-term rental property.
In some cases, you will need to collect the taxes from your renters and submit them to the local government.
In many areas, Airbnb collects these taxes themselves and submits them. Read your documents carefully to see what is or is not included. Airbnb will let you know if you need to collect and remit guest taxes in your local area.
Airbnb Will Report to the IRS
Whether Airbnb sends you a 1099 form or not may depend on how much you make during the year.
If you have over 200 reservations and make over $20,000 per year, Airbnb will send you an IRS Form 1099-K. If you operate multiple Airbnb accounts, you may receive more than one tax form.
These forms are sent to the IRS as well as to you and are likely to be matched against the tax return that you submit. Keep in mind that even if you do not meet this threshold, you still need to report your income on your taxes.
Airbnb can be a rewarding, profitable experience for people who want to bring in extra income. You may find the self-employment tax rules confusing or not be sure how to deduct all of your business expenses. At Picnic Tax, we match you with an online accountant who can help to make sure that you maximize your tax savings and answer your questions about Airbnb taxes.