A new IRS rule impacting gig workers takes effect in 2023 and some gig workers and folks who run a side hustle such as selling merchandise on eBay and other websites might feel the impact early in the new year.
As you know, your income from side gigs and having a side business or side hustle is taxable. But starting in 2023 you will be getting a 1099-K form from companies that handle your business receipts if your third-party payment is at least $600. In years past, these third-party payment companies such as PayPal and Venmo wouldn’t send out a 1099-K unless you hit a $20,000 threshold. That threshold has dropped to $600 starting in 2023 because the IRS is doing more to boost compliance with the tax laws. Gig economy workers are being targeted by this move.
WHAT IF THE MONEY TRANSFER IS FROM A FRIEND OR RELATIVE?
Sometimes, we make money transfers or receive money transfers from friends or relatives. Will we have to declare this money as taxable income? The IRS says no. The IRS says money received through third-party payment applications from friends and relatives as personal gifts or reimbursements for personal expenses is not taxable. But now, you’ll have to keep records about what is personal and what is business.
THE BASIC TAX LAW HAS NOT CHANGED
Remember that there is no change to the taxability of income and you’ve always had to declare income from selling merchandise or providing services in the gig economy. But what has changed are the reporting rules for form 1099-K.
As before, income, including from part-time work, side jobs or the sale of goods, is still taxable. Taxpayers must report all income on their tax return unless it is excluded by law, whether they receive a Form 1099-NEC, Nonemployee Compensation; Form 1099-K; or any other information return. What has changed is the threshold for requiring a form 1099-K.
HOW THE REPORTING LAW CHANGED
The American Rescue Plan Act of 2021 (ARPA) lowered the reporting threshold for third-party networks that process payments for those doing business. Prior to 2022, Form 1099-K was issued for third party payment network transactions only if the total number of transactions exceeded 200 for the year and the aggregate amount of these transactions exceeded $20,000. Now a single transaction exceeding $600 can trigger a 1099-K.
IMPACT OF THE NEW NEW REPORTING LAW CHANGE
The lower information reporting threshold and the summary of income on Form 1099-K enables the IRS to more easily track the amounts received by gig workers and what they are reporting on their tax returns.
YOU MAY NEED TO MAKE ESTIMATED TAX PAYMENTS
Income taxes must generally be paid as taxpayers earn or receive income throughout the year, either through withholding or estimated tax payments. With this new 1099-K reporting requirement, some taxpayers may find that they may need to make estimated tax payments during the year to avoid penalties
If the amount of income tax withheld from one’s salary or pension is not enough, or if they receive other types of income, such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, they may have to make estimated tax payments.
If they are in business for themselves, individuals generally need to make estimated tax payments. Estimated tax payments are used to pay not only income tax, but other taxes as well, such as self-employment tax and alternative minimum tax.
ASK A TAX PROFESSIONAL
As always, our advice is that you should discuss this tax change and all of your tax issues with a tax professional. We offer a free consultation about tax issues. We have tax attorneys, CPAs and Enrolled Agents who can answer your specific questions. Our tax resolution experts can discuss with you options for resolving your IRS debt including the IRS Fresh Start Initiative and the IRS Offer In Compromise Program.
If you don’t know where to start, call me. My direct phone line is 949-570-9908 and I’ll be happy to suggest different routes you can take to get your issues resolved. Watch my video below.
Remember, talk to a tax professional. That’s the best thing you can do when you have a tax issue.