The IRS, in recent guidance, concluded that the “rents” from many short-term rental arrangements are subject to U.S. self-employment taxes (“SE Tax”). In this guidance, the IRS ruled that a taxpayer was subject to SE Tax in the following situation.

The taxpayer (i) purchased real estate located near a beach, (ii) rented it to third parties., (iii) average rental was less than seven days; and (iv) materially participated in the rental activity (i.e., it was not operated by a management company). The rental was a fully furnished vacation property. They provided (i) linens and kitchen utensils, (ii) daily maid services, including delivery of individual use toiletries, (iii) access to dedicated Wi-Fi service, (iv) access to beach and other recreational equipment, and (v) prepaid vouchers for ride-share services to the nearest business district.

The IRS ruled that only payments for use of space and the services required to maintain the space for occupancy are excluded from self-employment income. If the owner performs substantial services such that compensation for services can be said to constitute a material part of the payment made by the tenant, the income is subject to SE Tax. Here the IRS determined that the exception did not apply because the owner rendered substantial services to the occupants.

A strategy for reducing (but not completely eliminating) the SE Tax in this situation may be to provide management services to your property company through an S corporation management company. By doing this, you can separate the service income from the rental income so that the rental income is not subject to SE Tax. In addition, depending on the facts, it may be possible to take only a portion of the earnings of the S corp as compensation subject to employment tax and then take the rest as dividends (not subject
to SE Tax).

Bottom Line: If you are managing your own short-term rental, be sure to consult your tax professional about reducing your SE Tax exposure.

“Accept who you are. Unless you’re a serial killer.” – Ellen DeGeneres.

Print:
Email this postTweet this postLike this postShare this post on LinkedIn
Photo of James Duffy James Duffy

Jim is a partner in Taft’s Tax practice and practices principally in the areas of federal tax law; tax credit financing; individual, partnership and corporate tax planning; M&A; tax-exempt organizations and general commercial and corporate law.

Jim has been actively practicing in the

…

Jim is a partner in Taft’s Tax practice and practices principally in the areas of federal tax law; tax credit financing; individual, partnership and corporate tax planning; M&A; tax-exempt organizations and general commercial and corporate law.

Jim has been actively practicing in the area of the New Markets Tax Credits (NMTC) program since its inception in 2001. He has organized community development entities (CDEs) and represented CDEs, borrowers and other parties in structuring and closing numerous NMTC transactions. Jim also advises clients regarding Qualified Opportunity Zone matters.

Jim advises LLCs, partnerships, corporations and individuals in connection with the formation of new companies, mergers and acquisitions, formation of joint ventures, like-kind exchanges, ownership succession planning, and general business operations. These clients are involved in a variety of industries, including banking, venture capital, real estate, construction, consulting and investing.

Jim also advises charitable and non-charitable tax-exempt organizations, including health care entities, schools, religious and civic organizations. In addition to advising management of these organizations with respect to matters pertaining to general operation and maintenance of tax-exempt status, Jim has assisted clients in forming, restructuring and dissolving tax-exempt organizations, as well as forming donor- advised funds.

Prior to joining the firm, Jim worked at the law firm of Lewis Rice and Fingersh in St. Louis, Missouri, where he concentrated his practice in federal and state taxation. He also clerked for the Hon. Robert P. Ruwe of the U.S. Tax Court in Washington, D.C.

Read more about James Duffy
Show more Show less
Related Posts
pexels-shkrabaanthony-5862284
Did you know that the IRS has issued guidance on how to open the new Trump Accounts?
December 3, 2025
115
Did you know that you can make a like-kind exchange into an interest in a Delaware Statutory Trust?
November 5, 2025
did you know
Did you know that you can make up for that profits interest that you intended (but forgot) to issue in a prior year?
October 22, 2025