Typically, rental real estate is a passive activity, reported on Schedule E, and is not subject to the self-employment tax (currently 15.3%). However, as we will learn with Airbnb properties, that is not always the case.
For starters, if you are renting part of your home as an Airbnb for 14 days or less, you do not have to report or pay taxes on that income at all. Nice right? Of course, you cannot deduct related expenses either.
The duration of the average stay at your Airbnb also does not cause you to be subject to the self-employment tax.
However, when your average stay is less than 7 days, it is considered a business and not a rental activity, and is reported on Schedule C. Normally, income reported on Schedule C is subject to the self-employment tax, but that’s not always the case for rental properties.
As long as you are simply renting out your Airbnb and providing no additional services, you will avoid the 15.3% self-employment tax, even if it is reported on Schedule C.
For a rental property to be subject to the self-employment tax, you would provide substantial (beyond regular rental real estate services) to long-term tenants.
These services can include:
This is because you are now providing a more hotel-like service, which is considered a business and subject to the self-employment tax.
So if you are renting out a property using Airbnb or a similar service, and want to completely avoid the self-employment tax, then it is important not to provide substantial services to your guests.
So what if you do provide substantial services to your guests, now what?
Well, there are a handful of things that can help you mitigate the self-employment tax. The first is making sure you are properly tracking and deducting all your rental expenses, including depreciation. As we know this “phantom expense” can cause a property to show a loss for tax purposes, or at the very least significantly reduce the net income.
The next is putting your Airbnb properties in an S-Corp, or an LLC taxed as an S-Corp. By doing this you can split your income between W-2 wages, which are subject to the self-employment tax, and distributions which are not.
While not really a tip, but something to keep in mind, if you’re already earning $118,500 or more before your Airbnb income, you will only pay the 2.9% Medicare portion of the tax because the Social Security portion of the tax is capped on $118,500 $137,700 (updated for 2020) of income.
As long as you are not providing substantial services to your guests, you shouldn’t have to worry about the self-employment tax on your Airbnb.
However you will want to work with a tax professional who understands how to properly report these properties come tax time.
Be sure and check out our article, Tax Consequences For Section 280A and Airbnb Vacation Rental Assets.
Author: Thomas Castelli, CPA is a Tax Strategist and member of The Real Estate CPA, an accounting firm that helps real estate investors keep more of their hard earned dollars in their pockets, and out of the government's, by using creative tax strategies and planning.
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Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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