Are Short-Term Rentals Subject to Self-Employment Tax?

The rise of short-term rental platforms has created new income opportunities for property owners. A central question for many hosts is whether their rental income is subject to self-employment tax. Generally, income from renting property is not subject to this tax, as the Internal Revenue Service (IRS) views it as passive income.

This passive treatment, however, is not absolute. An exception exists that can reclassify rental earnings as active business income, making it fully subject to self-employment taxes. This distinction is particularly relevant for short-term rental operators who may offer more than just basic lodging.

The General Rule for Rental Real Estate Income

The IRS considers income derived from the rental of real estate to be passive. This classification means the income is not earned from regular, continuous, and substantial involvement in an activity, distinguishing it from wages or business profits. For tax purposes, this passive income is reported on Schedule E (Form 1040), Supplemental Income and Loss.

When rental income is properly reported on Schedule E, it is not subject to self-employment taxes. Self-employment tax, which covers Social Security and Medicare contributions for individuals who work for themselves, is calculated on net earnings from self-employment. This treatment applies to traditional long-term residential leases where the property owner’s involvement is limited to collecting rent and performing basic maintenance.

The expenses associated with the rental, such as mortgage interest, property taxes, insurance, and repairs, are deducted from the gross rental income on Schedule E to arrive at a net profit or loss. This net figure is then included in the taxpayer’s adjusted gross income but does not flow to Schedule SE, the form used to calculate self-employment tax.

Under what is commonly known as the “14-day rule,” if you rent out your property for 14 or fewer days during the year and also use the property yourself, you do not have to report the rental income. Consequently, the expenses associated with that rental period are not deductible.

The Substantial Services Exception

The passive income treatment for rentals changes if the property owner provides substantial services to occupants. When services are provided for the convenience of the guest and are not typically associated with the simple rental of a space, the activity may be reclassified as a business. This reclassification means the net income becomes subject to self-employment tax.

Substantial services are those that go beyond what is customarily rendered for the occupancy of a room or property and are often described as “hotel-like.” Examples include:

• Providing daily cleaning of the rental unit while it is occupied
• Changing linens on a daily basis for the same guest
• Offering to provide meals
• Acting as a concierge by arranging tours or making reservations
• Providing transportation

In contrast, incidental services do not trigger the self-employment tax. These are services necessary for maintaining the property’s condition. Providing essential utilities such as heat, light, and water is considered incidental, as are trash collection and routine maintenance. A key distinction is that cleaning the property after a guest departs to prepare it for the next occupant is not a substantial service; the service must be provided for the convenience of the current guest during their stay.

If a host simply provides a clean, furnished property with utilities and handles cleaning between guests, the income is likely passive and reported on Schedule E. If that same host begins to offer daily breakfast and local tour packages as part of the rental fee, they have likely crossed the threshold into providing substantial services. The activity then resembles a bed and breakfast or hotel, and the income must be reported as a business on Schedule C, subject to self-employment tax.

How to Report Your Short-Term Rental Income

The determination of whether you provided substantial services directly dictates the tax forms you must use.

If You Did NOT Provide Substantial Services

For property owners who only provide incidental services, the financial activity is reported on Schedule E, Supplemental Income and Loss. On this form, you will list your total rental income received for the year. You will then deduct all ordinary and necessary expenses associated with the rental, such as advertising, insurance, mortgage interest, property taxes, repairs, and depreciation. The resulting net income or loss is then carried to your Form 1040.

If You DID Provide Substantial Services

If you conclude that you have provided substantial services to your guests, your rental activity is considered a trade or business. In this case, you must report all income and expenses on Schedule C, Profit or Loss from Business. The net profit calculated on Schedule C is considered self-employment income and must be reported on Schedule SE, Self-Employment Tax. Additionally, your rental activity may be eligible for the Qualified Business Income (QBI) deduction, which can lower your overall tax liability. To qualify for the deduction, your rental activity must be considered a trade or business.

Considerations for Real Estate Dealers

A separate set of rules applies to individuals who are classified as real estate dealers. A real estate dealer is someone who is in the business of buying and selling properties. This is different from an investor who buys property to hold for rental income or appreciation. The primary purpose of holding property for a dealer is for sale to customers in the ordinary course of their business.

For a real estate dealer, any income generated from the rental of properties held for sale is considered business income. This means the rental income is subject to self-employment tax, regardless of whether substantial services were provided to the tenants. This classification is less common for the average person renting out a second home or a room. It applies to individuals whose primary occupation involves developing and selling real estate. If you are classified as a dealer, your rental income will be reported on Schedule C.