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Home›Cleaning Services›IRS Finds Many Airbnb-Style Rental Arrangements Subject to Self-Employment Tax | Neal, Gerber & Eisenberg LLP

IRS Finds Many Airbnb-Style Rental Arrangements Subject to Self-Employment Tax | Neal, Gerber & Eisenberg LLP

By Jennifer Shiffer
January 18, 2022
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The ongoing COVID-19 pandemic has caused many people to reevaluate vacation destinations and where they choose to work. Why work in snowy Chicago during the winter months when you can do the same job remotely in a tropical destination. As a result, individuals are increasingly turning to short-term rental packages offered by online platforms such as Airbnb, VRBO and HomeAway that allow owners of everything from vacation homes to guest rooms to connect with a wider range of potential tenants. The IRS and other tax authorities have taken notice and in recent guidance concluded that the “rents” of many short-term rental arrangements are subject to US self-employment taxes.

In IRS Chief Counsel Memorandum 202151005 (December 23, 2021), the IRS assessed two “general” fact patterns for short-term rental agreements. In the first example, the owner has rented a fully furnished vacation property through an online rental marketplace. The owner has provided linens, cooking utensils and various other items to make the property fully habitable for the occupants. The owner has also provided daily cleaning services, access to dedicated Wi-Fi, access to beach and recreational amenities, and prepaid rideshare vouchers between the rental property and the nearest business district. Although the owner provided important items and services to guests, they were of a type that is not unusual or extraordinary for the online rental market.

The IRS has concluded that the net rental income in this example constitutes “net self-employment income (“NESE”). Generally, rental income is treated as an exception to NESE. However, the IRS determined that the exception did not apply because the landlord also rendered substantial services to the occupants. The IRS determined that the services provided to the tenant exceeded the services required to maintain the space in a condition suitable for occupancy and were for the convenience of the tenant. Because the IRS considered rental payments to implicitly include a large payment for services, the net rental income constituted the NESE and, therefore, should be subject to the 12.4% FICA tax and the Medicare tax. 2.9% (and potentially subject to the additional 0.9% Medicare Tax on self-employment earnings above certain thresholds).

In the second example, the landlord has rented a fully furnished bedroom and bathroom in a unit through an online rental marketplace. The owner cleaned the bedrooms and bathroom between each occupant’s stays, but provided no other amenities or services. The occupants did not have access to the common areas of the dwelling, such as the kitchen and the laundry room. Thus, the landlord generally did not provide any services other than keeping the premises in a good state of occupancy.

In the second example, the IRS concluded that the net rental income was not NESE because the landlord failed to provide substantial services beyond those required to maintain the space in a workable condition. occupation. The IRS did not consider cleaning of premises between occupants to be substantial services for the convenience of occupants that should cause rental income to be subject to self-employment taxes.

In its guidance, the IRS has deliberately taken into account factual patterns with varying levels of services provided to occupants by the landlord. Whether the services are for the “convenience” of the occupants, or sufficiently “substantial” to justify treating a portion of the rent as in exchange for the services, is inherently based on the facts and circumstances of each case. Clients engaged in rental business through online marketplaces must balance the increased attractiveness of their property that results from the provision of services against the likelihood that the IRS will consider rental payments subject to labor taxes. independent. Notably, the IRS memo did not address the tax implications of working remotely from the perspective of the short-term tenant, but expect future guidance on the implications for employees and employers of from federal and state tax authorities, as more and more people continue to work away from their main office.

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