Are Airbnb Owners Subject to the Self-Employment Tax?

If you earn rental income from an Airbnb or other type of short-term rental service, you may be subject to self-employment taxes. The extent of your tax liabilities may depend on your legal business structure and how much you earned in 2022. More importantly, it may depend on the level of services you provide your tenants. The IRS recently discussed this issue in Chief Counsel Advice (CCA), which is often helpful for taxpayers and tax advisors when it comes to understanding tax laws where the rules aren’t always so clear.

Specifically, this CCA asks if net income from renting out living quarters is excluded from self-employment income under Section 1402(a)(1) of the IRS tax code. This refers to situations where the rental owner is not classified as a real estate dealer.

Self-Employment Tax Exclusion

You may be excluded under this tax code, which means self-employment tax is not owed on net rental income if you aren’t a real estate dealer. The money earned from renting out living quarters is considered rental income from real estate. Therefore, it is excluded from self-employment income—as long as you don’t provide services to rental occupants.

What Are Taxable Services?

It is a statutory provision when net rental income is collected by a non-dealer. The statute itself doesn’t say anything about providing services. However, the IRS regulations state that providing services to renters could lead to a loss of this self-employment income exclusion. This is where it gets tricky, as here is how the IRS defines “services” provided by a rental owner:

• Services provided are beyond the requirements of maintaining living quarters in a condition for occupancy; and
• are so substantial that compensation for the services constitutes a material portion of the rental fee.

In other words, it is okay to provide the necessary services to your renters (cleaning, wi-fi, etc.). However, there may be a line you can cross when those services are considered beyond what is required. According to IRS regulations, services that would incur the self-employment tax are beyond the norm only if they exceed services customarily provided to short-term renters of living quarters.

Circumstances & Substantiality

The circumstances of your rental can make a significant difference. For example, vacation home renters in resort areas typically expect a certain level of services. This may even include access to recreational equipment. Short-term rental prices in these situations tends to be higher than a standard residential area rental, especially during peak seasonal periods. Some services could be considered excessive, and it’s almost always an argument that special services provided will be factored into the overall rental price.

Another issue is substantiality. It can be difficult to know exactly where the line is and it is a rarity for vacation home rental owners to be exposed to the self-employment income tax. A “service” may have to be very excessive and add a significant amount to the rental rate in order to trigger this tax. In most cases, it can be argued that the service (and any added fees for those services) aren’t substantial enough to cause self-employment tax exposure for the owner.

Professional Tax Guidance

As you can see, there are a lot of gray areas with this particular tax code and tax planning for an Airbnb, VRBO or other short-term rental property can be more complex than expected. It’s smart to work with an experienced tax advisor who can help you navigate the tax codes and minimize your tax liabilities as a rental property owner. Contact Illumination Wealth today for all your tax planning and financial advisement needs.