This is a guest post from our friends at Avalara MyLodgeTax! Gary Lundberg lays out the biggest mistakes they see as experts on short-term rentals and lodging taxes.
We’ve seen just about every mistake in the book when it comes to property owners paying taxes on their vacation rentals.
In our 13 years of experience in the lodging tax industry, the cases we’ve seen could fill a library – but we’ve managed to whittle them down into the top 4 lodging tax pitfalls that can catch you off guard if you aren’t looking out for them.
Evolve recently covered the basics of how to look up your vacation rental tax rate and how to manage tax payment, but even owners who understand that they need to collect and remit taxes sometimes make these common mistakes – and they can be very costly.
Here are the four biggest mistakes we see – and what you can do to fix them.
1. Charging the Wrong Tax Rate
You’re licensed, your property is ready to rent, and you know you need to collect and remit lodging tax. Looking good so far! But many owners wind up charging an incorrect amount of lodging tax, which opens them up to the same problems as those who don’t charge a tax at all – eventually, various tax authorities will figure out that the money is missing and demand you cough it up.
This means it’s essential to figure out the right composite tax rate for your property.
With few exceptions, most properties are governed by three different tax authorities – city, county, and state – but there can be more. In popular tourist areas, there may be “special tax jurisdictions” that add yet another layer.
Each tax-collecting entity may have differing rules on applying those individual rates depending on length of stay, type of renter, etc. The rates can also change, which means it’s important to check the tax rate for each entity every year.
Whew! That’s a lot to research. Fortunately, we have a tool that can make it much easier for you to find the correct tax rates for your area: our handy lodging tax rate lookup tool.
2. Not Knowing When, Where, and How to Pay Tax
You may be aware of the need to charge and collect lodging tax from your renters and found out that the lodging tax rate for your area is 9%. (Don’t know what your local tax rate is? Use this tool to find out.)
Once you have that 9% tax, though, where does it go? That 9% could break down to 4.1% paid to the city, 3.2% to the county, and 1.7% to the state.
The filing periods for each jurisdiction can differ, too. You could potentially file monthly to the city, quarterly to the county, and annually to the state. Keeping all of the tax amounts and payment timing sorted out is a challenge for even the most experienced property owners!
You definitely want to know when you should be filing taxes to each entity and meet the appropriate deadlines. If the government thinks you’re collecting taxes with no intention of paying them over to the local, state, and federal governments, they can actually file criminal charges against you.
3. Thinking You Don’t Need to Worry About Lodging Taxes Until Tax Season
Lodging taxes are not income taxes. Many property owners simply add their rental revenue to their annual personal income tax return. This is not correct!
Although it may seem like it’s just your own income from renting your property, the difference is there’s been a transaction between you and your renter. Lodging tax is a form of sales tax on rental transactions – and rental transactions must be treated differently than personal income.
When you pay income taxes, you are paying a percentage of the money you earn to the government. When you rent your home to someone else, you aren’t paying the tax – your renter is. You’re simply collecting the correct amount of tax and paying it forward to the appropriate tax authorities.
That’s why it’s so critical to pay attention to #2 above and know when you’re supposed to be handing those taxes over to each authority. That money isn’t yours! You’re just acting as an intermediary between the traveler and the tax agent. You’re holding the money temporarily, but you need to turn it all over to the correct tax authorities on the schedule they dictate in your area.
4. Not Filing Lodging Tax Returns Consistently
Some property owners believe that they only need to file lodging tax returns for the periods in which they actually rented their property. “I only rented out my property in June, so I only need to file a June return, right?” Wrong.
You may be charging and collecting lodging tax and filing returns, but unless you do so every required filing period, it will raise red flags with the authorities and could get you into trouble.
As unusual as it may seem, the tax authorities still require a return claiming $0 in rental revenue (and $0 in lodging tax) for every filing period. Whether you rent your property out or not for that period of time, you still need to file a return if you intend to continue using it as a rental at any point in the year. The tax authorities want to be sure you’re not “skipping” a period and pocketing your tax revenue, and this is how they do that.
Even if you only rent your property during one month out of the year, you’re not off the hook for filing lodging tax returns for the rest of the year. Your lodging taxes are due on the days required, even if you owe $0.
Bonus Mistake: Trying to Handle It Yourself
If you’re a professional accountant, you might be able to tackle the ins and outs of lodging taxes without any trouble. Otherwise, you’re probably going to want to enlist the services of a professional.
Lodging taxes are expensive to get wrong, but with MyLodgeTax, we make it easy to file them correctly. If you’d rather stay out of trouble and be confident that your taxes are done right, we can help.
Gary Lundberg, the author of this guest post, is the Director of Marketing and Product Management at Avalara MyLodgeTax. We’ve been recommending MyLodgeTax to our owners for years – they’re both professional and friendly, and they know lodging taxes inside and out.
Making sure you have access to all the services you need is just one of the ways Evolve makes vacation rental easy for owners. Click here to learn more about how we can help you run a hassle-free, highly profitable vacation rental!