Peer-to-peer car sharing is a great way to earn some extra income. But the money you make is just that — income. That means you need to report and pay taxes on your earnings. Follow these tax tips to lower how much you owe and take advantage of all the available deductions.
With peer-to-peer car sharing, you can rent out your personal car for others to use. It’s an easy form of passive income using an asset you already own. Demand for peer-to-peer car sharing in Los Angeles and other major cities has been growing consistently, and even more so since the traditional car rental industry is experiencing major inventory shortages.
When you share your car, you must report the income on your taxes if the total is over $600. You may receive a 1099 form from the company you work with, outlining exactly how much you earned. But even if you don’t receive a 1099, you still need to report the income on your federal and state taxes.
Follow these six tips for taxes to maximize your car sharing profit each year.
In most cases, it makes sense to classify your car sharing earnings as business income rather than nonbusiness income. This lets you take tax deductions on any business-related expense. That, in turn, lowers the amount on which you have to pay income taxes. For example, say you earned $2,500 throughout the year but spent $800 on relevant expenses. Instead of being taxed on the full $2,500, you would only pay taxes on $1,700. Let’s say your federal tax rate is 30%. You could lower your tax bill by $240 just by accurately classifying that money as business income.
Clearly it’s important to include all of your business expenses on your tax return in order to reduce your bill to Uncle Sam. So what types of expenses can you include for your peer-to-peer car sharing business? You may be able to deduct part or all of the following:
A lot of people use their personal vehicle for car sharing. That’s the point — to make some money on something you already have, especially when you’re not using it. But that also means things can get tricky when claiming business expenses. You must clearly delineate which expenses are for personal use and which are for business use, because you can’t claim personal expenses on your business income. The good news is that you can prorate those shared expenses. So if you make car payments each month but share your car 10% of the time, you could deduct 10% of those total costs. Working with an accountant can help you figure out the best approach for claiming deductions, and tax software programs also should have built-in features to calculate them.
The IRS recommends keeping your expense receipts for at least three years in case you’re audited later on. Plus, you’ll have a much easier time when tax filing season arrives if you have all of your receipts in one place. Otherwise, you’re likely to forget some of the things you’ve spent money on during your car sharing time, like car washes or routine maintenance. Good record keeping helps you now and later!
A common mistake made by new entrepreneurs (even if it’s just a side hustle) is to forget to budget for self-employment tax. When you work as an employee at a company, your employer pays for a portion of your Social Security and Medicare taxes. But when you’re reporting business income, you are responsible for the full amount. The full self-employment tax rate is 15.3% — and that’s on top of your regular income tax rate. If you’re worried about a high tax bill, ask an accountant how much to expect to owe on your peer-to-peer car sharing income.
Once you make over $1,000 each year in business income, you need to make quarterly estimated payments to the IRS (and potentially your state as well). The IRS Form 1040-ES can help you calculate how much you should pay each quarter. Then you don’t have to worry about surprise tax bills or any type of late payment penalty. Car sharing with Avail is an easy way to make money from your car when you’re not using it. Sign Up Today!
Please note that the information provided does not, and is not intended to, constitute legal or tax advice. All information is for general informational purposes only. Readers should contact a tax professional to obtain advice with respect to any particular financial matters.
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