Tuesday Tip: Don't Pay Self-Employment Tax on your STR

[Matthew Cervoni]

Self-employment taxes are imposed on self-employment income in lieu of Social Security and Medicare taxes that an employee would typically have withheld from their paycheck. It is calculated on the net income that an individual derives from a trade or business. 

Rental income is not considered self-employment income, and therefore is not subject to this tax unless it is received in the course of a trade or business as a real estate dealer (IRC 1402(a)-4). 

Does it surprise anyone that things don't simply end there? 

Whenever substantial services are provided for the occupant in connection to the rental, the IRS may view your activity as a hospitality business that would be subject to the self-employment tax. (Think hotel businesses.)

So, this weeks Tuesday Tip is to understand what those substantial services are so you can determine if the juice is worth the squeeze when deciding what level of service you will provide at your STR. Here are the most common:

Transportation Services

Daily Cleaning

Concierge Services

Providing Food & Beverage (Bed & Breakfast style)

Conducting tours and other outings & events

So, what can you provide without triggering self-employment taxes? Based on past cases and revenue rulings, other services that are required to maintain the space in condition for occupancy and are not "substantial" include: 

Utilities

Furnished Units

Incidentals such as bottled water, snacks, toilet paper, and soap

Cleanings of common areas or cleanings after the occupant has ended their stay

Unfortunately, there is no clear line drawn in the sand as to what services might trigger a self-employment tax liability; the substantiality requirement creates a significant gray area to be navigated. 

If you have an Airbnb rental property, please consult your tax advisor for guidance on your specific situation.