How Airbnb Makes Tax Day So Much Worse
Apr 15 2014
Rus Garofalo is one of those only-in-Brooklyn entrepreneurs, a comedian and CPA whose company, Brass Taxes, helps New York’s self-employed creatives get right with Uncle Sam every April 15.
Freelancers’ finances are trying in the best of times, but recently Garofalo and his ilk say they’re being bombarded by a kind of 1099 nightmare: cash-strapped artists turned novice hoteliers who rent out their spare rooms, or even couches, to travelers on Airbnb.
“It’s maybe 15 to 20 percent of people are doing it,” Garofalo said of his clients, whom he now charges a premium on top of his regular fee if they use the site. “I think with all the political stuff and law changes that are happening, people are backing off somewhat, but I feel like I had a couple of clients last year who it was their main source of income.”
They’re not alone: Airbnb released an economic-impact study last fall revealing that about 30 percent of the 13,500 New York City hosts identify themselves as freelancers, while more than 8,000 New Yorkers rely on income from the site to keep them in their homes. That’s still just a fraction of the city’s 100,000 independent workers who belong to the Freelancer’s Union. But it’s growing fast.
“I feel like part of my job is sleeping away from home: I make as much leaving as I would staying and doing freelance work,“ said artist Carol, who asked to be referred to by her middle name because she feared she could lose her livelihood if her landlord learned she was camping out at her studio and letting her Williamsburg apartment on Airbnb. “I made $18,000 on Airbnb, so I assumed that I owe a chunk of that in tax. That doesn’t mean that I’m prepared for it, but I wasn’t surprised.”
For others, they look at the IRS as an unwelcome intruder on their new economic reality. If their sublets had been listed on, say, Craigslist, the taxman wouldn’t come knocking on their door.
“At the end of the year they get a 1099-K and all of a sudden realize they have to deal with it, and then a thing that was just some extra pocket money is something they’re dealing with on their taxes,” Garofalo said. “It might be $2,000 of income, but it’s complicated enough and confusing enough that people are surely going to make mistakes doing it unless they take some amusement in diving into the miasma of googling tax terms.”
Even before the sharing economy exploded, tax season was an anxious time for independent workers. Unlike fulltime employees, who get the bulk of their tax information from a single W-2 form, freelancers must cobble together information from a string of 1099s. The upshot, for many, is to do what they love and also itemize it on their taxes: Just as a homeowner can deduct a new energy-efficient furnace, an actress may claim her headshots and web developer his Wired subscription.
Knowing precisely what is and isn’t deductible is part of what keeps Garofalo in business.
“Somebody just handed me a rental as if it were part of their freelance income, and it’s not,” said Susan Lee, a New York City tax pro who has built her business around the 1099 set. “What it’s showing to me is that freelancers are getting crushed, and they're doing anything to make more money.”
According to her, many may forfeit as much in lost deductions as they make in rental income: Lee recently consulted a cash-strapped couple who’d used Airbnb to keep up with a rent beyond their means, only to find they now owed more in taxes than they’d made from the service, in part because of deductions they’d lost in the process.
“Home offices have to be exclusively and regularly used,” Lee explained, referring to a popular freelancer deduction that also helps offset rising rents. “You can’t say it’s a home office on Tuesday at 3 but rent it out on Tuesday at 5.”
Others take on expenses like new furniture, appliances, or other amenities to make their homes attractive to tourists, assuming that they’ll be able to deduct them at the end of the year. But unless a new AC unit or wireless router is used exclusively by visitors, it can’t be itemized, and residents are stuck with the cost.
It’s not just the accountants who are seeing a shift: The Freelancers Union, a nationwide network of more than 250,000 independent workers, was suddenly overwhelmed by inquiries about how to account for sharing-economy income on tax returns.
“It went from basically zero to a pretty significant amount,“ said union spokesman Dan Lavoie. “Really, this was not on the radar screen not that long ago for any of our members. Now suddenly it is, and it’s a pretty significant income stream for a lot of freelancers.”
The one thing everyone seems to agree on is that creatives really want to pay their taxes. They just can’t quite seem to figure out how.
“Freelancers are a well-compliant group, and they are struggling to find a way to be compliant with this. On the one hand they need the extra income; on the other hand it’s not easy in this city to be in compliance,” said Jonathan Medows, a Manhattan CPA who also specializes in freelancers. “They’re kind of caught between a rock and a hard place. It’s so bloody expensive to be here, it’s created this cottage industry in New York.“
The CPA said it’s the company that should be scrambling for a solution, since the site makes money no matter what users end up owing or how hard it is for them to pay.
But Airbnb insists it’s not so simple: Exactly what hosts are responsible to pay can vary dramatically from city to city and state to state. Bring deductions into the picture and the variations expand exponentially. Then, of course, there’s the looming specter of hotel tax: Airbnb recently announced it will begin paying hotel tax on the company’s home turf in San Francisco, even as it continues to fight it in New York.
“We are a marketplace in 35,000 cities and the rules vary in each one,” company spokesman Nick Papas wrote in a statement when I called for the company’s response to the tax nightmare some of its hosts were facing. “There's no question that these are complicated issues and we're working to fix this by fighting for clear, fair rules for everyone in the sharing economy."
The site’s newly updated terms of service, which were announced on April 7 and will go into effect on the 30, offer more explicit guidance to those trying to piece out how to pay the IRS on its behalf this spring.
“Hosts should understand how the laws work in their respective cities,” the new rules state in all caps. “Hosts should review local laws before listing a space on Air.”
Follow Sonja Sharp on Twitter.
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