Do You Pay Social Security Tax on Rental Income?

Rental income can be a great source of earnings, but understanding its tax implications is essential. While federal and state income taxes typically apply, whether Social Security tax is owed depends on the nature of your involvement in the rental activity.

Passive vs. Nonpassive Classification

The IRS classifies rental income as either passive or nonpassive, impacting tax treatment. Most rental income is passive and exempt from self-employment tax, including Social Security tax, since it does not require continuous, hands-on involvement. However, certain factors can lead to a nonpassive classification with different tax consequences.

One key factor is whether the rental activity qualifies as a trade or business. Under Section 1402(a)(1) of the Internal Revenue Code, rental income is generally exempt from self-employment tax unless substantial services beyond basic property management are provided. The IRS also considers whether the activity is conducted with continuity and regularity, similar to a business.

For example, a landlord who actively manages multiple properties—handling advertising, lease negotiations, and tenant relations without a property manager—may have their income classified as nonpassive.

Short-term rentals, such as those on Airbnb or Vrbo, are more likely to be considered nonpassive. If the average rental period is seven days or less and the owner is actively involved in managing the property, the IRS may classify the income as self-employment earnings, making it subject to Social Security and Medicare taxes at a combined rate of 15.3% in 2024.

Material Participation in Rental Activities

The IRS applies material participation tests to determine whether rental activity is passive or nonpassive. These tests assess the level of involvement in managing and operating the property. Meeting one of the seven material participation criteria in Treasury Regulation 1.469-5T results in a nonpassive classification, altering tax treatment.

A common way to establish material participation is by spending more than 500 hours per year on rental activities, including overseeing repairs, screening tenants, collecting rent, and maintaining financial records. Landlords with multiple properties may group them as a single activity under aggregation rules in IRC 469 to meet this threshold.

Another criterion is whether the taxpayer’s involvement exceeds that of anyone else managing the property. If no one else spends more time on the rental activity, it may be classified as nonpassive, even if total hours are below 500. This is particularly relevant for landlords who do not use property managers and handle most responsibilities themselves.

Social Security Tax on Additional Services

The services provided to tenants can determine whether rental income is subject to Social Security tax. Routine services like repairs, landscaping, and pest control are considered standard property management and do not affect tax treatment. However, offering amenities such as daily housekeeping, concierge services, or meal options can lead the IRS to classify the income as earned rather than passive, making it subject to self-employment tax.

This is especially relevant for short-term rentals, where services resembling those of a hotel may result in income being treated as self-employment earnings. Revenue Ruling 72-36 states that landlords who furnish substantial services beyond basic maintenance are engaged in a trade or business. If these services are a significant part of the rental arrangement, the income is subject to self-employment tax, including the 12.4% Social Security tax.

Landlords should assess whether the services provided are customary for rentals or add significant value beyond the property’s use.

Filing and Recordkeeping Obligations

Accurate documentation is essential for tax compliance. Rental income and related expenses must be carefully recorded, as the IRS requires landlords to report earnings on Schedule E (Form 1040). Unlike self-employment income, which is reported on Schedule C, rental income that does not meet the threshold for self-employment tax is categorized separately. Misreporting could trigger audits or reclassification by the IRS.

Maintaining detailed records of deductible expenses helps minimize tax liability. Expenses such as mortgage interest, property taxes, depreciation, insurance, and maintenance costs must be substantiated with receipts, invoices, and bank statements. The IRS mandates that depreciation be calculated using the Modified Accelerated Cost Recovery System (MACRS), which specifies recovery periods, such as 27.5 years for residential rental property. Errors in depreciation calculations can lead to understated deductions or complications when selling the property, as depreciation recapture under Section 1250 may apply.