The IRS has lowered its earning threshold from $20,000 to $600 for people doing side hustles and part-time work, warning on Dec. 1 that gig workers must declare their earnings if they get paid on third-party payment network transactions.
In the past, a 1099K form was triggered once gig workers crossed the $20,000 income threshold on more than 200 transactions. However, the threshold has dropped drastically since 2021 for how much workers can earn before they must file taxes.
The change became law in 2021 when the covid-19 stimulus package or American Rescue Plan Act was passed by Congress.
Gig workers and people who earn income in addition to full-time jobs should file the tax form 1099-K to declare earnings, the IRS said on its website. “You must report on your income tax return all income you receive. In most cases, your business income will be in the form of cash, checks, and debit/credit card payments.”
Unreported individual and small business activities cost an estimated $144 billion in taxes a year, according to a 2014-2016 IRS analysis. Americans report less than half of the income that is not automatically reported for them.
“I think the level of noncompliance from small businesses is staggering,” said Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, in a Bloomberg interview.
If you’re a small business owner and get most of your customer payments from credit cards, cash, or checks, you’ll likely be unaffected by the new IRS rules, Mary Girsch-Bock reported for CPA Practice Advisor. But if you use third-party payments to get paid, companies such as Zelle, PayPal, Square, Stripe, Venmo, and others will be sending you a 1099-K if you receive more than $600 in payments during 2022.
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“Both Uber and Lyft are also considered third-party settlement organizations or use an organization to pay their workers, so if you had a few gigs with either, you’ll be receiving a 1099-K as well,” Girsch-Bock wrote.
In the worst case, failure to declare earnings to the IRS could mean an audit, penalties, and accrued interest, tax expert Lisa Niser told Business Insider. Niser urged gig workers to hire an accountant.
Not all third-party payment companies agree that the IRS’s new rules apply to them.
A spokeswoman from the bank-to-bank payment service Zelle told Bloomberg that since it is a network that does not hold funds, the IRS rules don’t apply.
“Although Zelle offers a core service similar to those of PayPal, Cash App, Google Pay and other competitors, it was originally built as … a peer-to-peer payment service for a consortium of major banks. Today it’s integrated into users’ bank dashboards and run by (a company) jointly owned by seven banks (Bank of America, Truist, PNC, US Bancorp, JPMorgan Chase, Wells Fargo and Capital One). The service is an electronic network that manages automated clearinghouse (ACH) transactions.“
ACH networks are not subject to 1099-K reporting,” said Wendy Walker, chairwoman of the Information Reporting Subgroup of the IRS Advisory Council.
If people leave payment services that issue 1099-K forms in favor of Zelle, Congress could extend the law to include Zelle, or the IRS could investigate—perhaps seeking customer names from Zelle for “heightened auditing scrutiny,” Rosenthal told Bloomberg.
“It’s a dangerous game for tax cheats to migrate to Zelle,” Rosenthal said. “It wouldn’t be hard for the IRS to unravel that.”
Finance guru Dave Ramsey suggested some ways to keep your side hustle from messing up your taxes: