IS YOUR AIRBNB SUBJECT TO SELF-EMPLOYMENT TAXES?

The Covid-19 pandemic pushed a lot of individuals to rethink how they travel and where they choose to work. Why travel to a hotel packed with crazy kids when you can relax by a shiny pool all by yourself in an Airbnb? Why work in freezing cold Minnesota during the winter when you can do the same work on your laptop remotely from a beach in Florida?

As a consequence, savvy real estate investors have been turning more and more properties into short-term rentals on platforms like Airbnb, VRBO, and HomeAway. The IRS and local tax authorities have noticed, and in recent guidance, concluded that rental income from many short-term arrangements is subject to self-employment taxes.

Rental real estate is almost always considered a passive activity reported on Schedule E of your tax return and it is NOT subject to self-employment taxes. However, with most Airbnb’s, VRBO’s, HomeAway and other short-term rentals that is not always the case.

When the average stay of your rental is less than 7 days, it is considered a business and not a rental activity. Thus, it is reported on Schedule C and potentially subject to a whopping 15.3% self-employment tax on top of your federal and state income taxes.

If you are simply renting out your property without providing additional services beyond those required to maintain the space in a condition suitable for occupancy, then the rental income would NOT be subject to self-employment taxes even if it is reported on Schedule C.

SO WHEN IS A RENTAL PROPERTY SUBJECT TO SELF-EMPLOYMENT TAXES?

To attract more tenants and increase nightly rates, many owners of vacation rentals are offering additional services and amenities to their properties.

If you provide your guests with services beyond simply renting out the property, the IRS has determined that net rental income is then subject to self-employment taxes. These services can include but are not limited to the following:

• Cleaning the rooms during a guest’s stay

• Changing linens

• Providing fresh towels

• Providing hotel-like conveniences such as a coffee maker or kitchen utensils

• Providing, bikes, paddleboards, vehicles, or excursion options

The IRS determined that providing these types of hotel-like services makes you a business rather than a rental activity and therefore, the net rental income from your property gets an additional 15.3% tax on top of your federal and state income taxes!

WHAT DO YOU DO IF YOU PROVIDE THESE TYPES OF SERVICES?

There are numerous things you can do to help mitigate self-employment taxes – and today we will cover are top 3:

FIRST off is making sure you are properly tracking and deducting all expenses. We recommend that you use a software like QuickBooks Online or Xero as both allow you to link your business debit and credit cards which then pull all your expenses into the software making it much easier to track and organize them in one place. As professional accountants we receive discounts on these types of accounting software so please reach out to us if you want to save on your subscription!

SECOND is to make sure you are working with a professional tax preparer. We recently onboarded a new member who was doing his own taxes and they did not include depreciation expense on ANY of his 5 rental properties. Depreciation is a huge expense that can cause a loss for tax purposes but does not actually impact your cash because it is a “phantom expense”. At the end of the day it pays to work with a tax pro so go out and get one today!

THIRD is to put your rental property activity into an S-Corp or an LLC taxed as an S-Corp. This tax structure allows you to split your net income between W2 wages and distributions. The advantage of this is that distributions are NOT subject to self-employment taxes. This is hands down the number one way to reduce your tax bill as a self-employed individual. At ZanderFi, this our specialty and we offer FREE consultations to see how much you can save by forming an S-Corp and running your business on our platform.

BOTTOM LINE ON AIRBNB’S AND SELF-EMPLOYMENT TAXES

As long as you simply rent out your property and do not provide additional hotel-like services to your guests, then you shouldn’t have to worry about your rental income being subject to self-employment taxes.

But if you are like most hosts, you are constantly trying to increase your nightly rates by creating the best possible experience for your guests. As such, you are most likely providing hotel-like services to your guests and therefor you net rental income is now subject to self-employment taxes.

In almost every case, the increased rental income you generate when operating more like a hotel is far greater than the taxes you will have to pay in doing so. But you still want to minimize those taxes and work with a tax professional that understands how to properly report these properties come tax time, like ZanderFi (shameless self-promotion)!

And on a side note – make sure you check the local rules and regulations on short-term rentals before you buy your next rental property. We had a member close on his first investment property without doing his due diligence. He had intended to turn it into an Airbnb but the HOA does not allow them!