Right now, freelancers and small business owners need only report payments totaling $20,000 or any number of payments above a threshold of 200 with the forms. Beginning next year, that threshold will be just $600, and every income transaction will need to be reported.
Some in the space say the new law will benefit both freelancers and the IRS by improving information gathering, especially for people who are self-employed and those who sell on sites like Etsy and Ebay.
Right now, freelancers and small merchants already owe taxes on that income via third-party platforms, but it can be difficult to keep track of every payment, especially across sites and apps. This can lead to confusion and underpayment.
The coming change will affect platforms, businesses, and individuals, and it’s good to begin preparing now.
Here’s what you need to know:
WHAT SHOULD I DO TO GET READY FOR THE NEW 1099-K REPORTING THRESHOLD?
If you’re already keeping accurate track of your income from freelancing as paid via Venmo, Zelle, Cash App, PayPal, and other sites, you’re in good shape. The main difference will be that these platforms will issue you additional forms for every transaction, rather than transactions beginning at a threshold of either 200 payments or $20,000. This should make correct reporting to the IRS even easier.
Currently, if someone paying a freelancer via Venmo, Zelle, or CashApp sends a form to the IRS reporting that pay, but the (taxpaying) freelancer doesn’t report the income with the same form, that creates a “matching error” for the agency. This change will better ensure taxpayers receive proper refunds and the IRS receives proper payment.
WHAT IF I MISTAKENLY RECEIVE A 1099-K FORM?
In some cases, in part due to the changing guidance, platforms may send taxpayers 1099-K Forms in error — such as for transactions between family and friends or expense sharing, according to the IRS.
The first thing to do is try to get an updated form by contacting the company that issued the form incorrectly. If you can’t get one in a timely manner, the IRS says to zero out the income on your tax return with the description “Form 1099-K Received in Error.”
WHY DID THE IRS DELAY IMPLEMENTING THE CHANGE?
The change, which had been set to take effect this year, was delayed in December. The IRS decided to give taxpayers another year to adjust to the new reporting requirements to “help smooth the transition and ensure clarity,” according to acting commissioner Doug O’Donnell.
“The additional time will help reduce confusion during the upcoming 2023 tax filing season and provide more time for taxpayers to prepare and understand the new reporting requirements,” he said in a statement.
WHAT ADVICE AND GUIDANCE DOES THE IRS HAVE FOR FREELANCERS?
The IRS has an online Gig Economy Tax Center that focuses specifically on the tax questions and needs of freelancers and other workers in the informal economy. The site addresses common concerns and pitfalls.
WHAT IF I MAKE A MISTAKE REPORTING INCOME ON 1099-K FORMS?
The IRS will be in touch if they see discrepancies between income reported on 1099-K forms by taxpayers and companies issuing the forms, both this year and next. It’s important to keep in mind that income from all platforms, including things like YouTube ads and Patreon subscriptions, must be reported in this way. One way to make sure all income is accurately captured is to be sure to transfer all payments from your PayPal, Venmo, and Cash App accounts to a traditional bank account, rather than keeping it on third-party platforms.
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