The federal government needs to raise more money amid chronic deficits, so it's no wonder Congress and the IRS are putting gig jobs and other self-employment work under the microscope.
That means millions of taxpayers could face tougher income-reporting requirements on payments made through third-party platforms such as Venmo, PayPal or Cash App. The new rules were delayed for the 2022 tax year but will resume unless Congress or the IRS make further modifications.
The policies are designed to make sure that job income is reported more fully, but they also could snag people who use third-party payment networks to transfer money for personal reasons.
It's no secret the government has run deficits for years, and the shortfall is projected to grow. Households and businesses collectively pay only about 85% of the taxes they owe, with the difference known as the tax gap. Self-employed individuals and sole proprietors “represent the largest share of the individual underreporting tax gap,” the Government Accountability Office said.
Hence, the goal of the new rules: prod more people to declare all of their income.
What do the tougher reporting rules entail?
Freelancers, gig workers and self-proprietors are supposed to report all of their job income and pay taxes on it, but noncompliance is a problem. This income is supposed to be reported on 1099-K forms, so the IRS and Congress decided to tighten the rules, with more focus on transactions made through third-party payment systems.
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Prior to 2022, the forms were required to be issued to taxpayers only if total payments for a recipient exceeded $20,000 in a year and the number of transactions for that person topped 200. But the American Rescue Plan Act of 2021 lowered the threshold to amounts over $600 and applied it to any number of transactions, meaning a lot more people are affected. However, the IRS delayed implementation of the new rules for the 2022 tax year.
Why did the IRS delay the $600 threshold?
The delay reflected taxpayer confusion, lack of clear guidance from the IRS and concerns about the backlog of unprocessed tax returns, said the office of the Taxpayer Advocate Service, a watchdog group within the IRS.
Lowering the threshold from $20,000 to $600 would substantially increase the number of 1099-Ks that need to be issued, creating more work for individuals, businesses and tax-return preparers.
Plus, many people pay other, personal expenses through these platforms. Unlike job income, personal transactions aren’t taxable, but the IRS could flag them as such, upon receiving 1099-Ks from a third-party payer.
Suppose a few friends regularly have meals together and one person pays the bill, after which the others send that person money through Venmo. “Unless the account or payment is designated as personal, it will trigger a reporting requirement if the annual amount exceeds $600,” said the Taxpayer Advocate Service. If the person receives a 1099-K but doesn't list the amount on their tax return, it could create a mismatch with what was reported to the IRS, which then might order the person to pay more tax and possibly impose a penalty.
According to the Taxpayer Advocate Service, the IRS has stated that if taxpayers receive an erroneous 1099-K, they need to inform the third-party payment provider and convince it to issue a corrected one. That can pose more hassles, especially since the anticipated volume of new 1099-Ks could be in the “tens of millions," the service said.
How would other transactions get handled?
Suppose you sell some belongings in a garage sale, receive electronic payments totaling $1,000 then later receive a 1099-K. You kept good records and can show that you had bought these items for $3,000, netting a (nondeductible) $2,000 loss. You would report the $1,000 in proceeds on your tax return but would note that the items were sold at a loss, meaning proceeds from the sale aren't taxable, said Peter Mills, senior manager for tax policy and advocacy at the AICPA.
Conversely, suppose you had a gig as a dog walker and received all $3,000 of your payments for the year through an electronic platform, which issued a 1099-K. You must report this and all other self-employment on your tax return, even if a 1099-K isn’t issued, Mills added. The basic rules regarding the taxability of job income haven't changed.
Incidentally, gains on the sale of personal property are taxable but losses aren't deductible. Sorting all that out can get complicated, as seen in IRS answers to common questions about the 1099-K rules that also explain how to describe certain transactions on your tax return.
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Where do we go from here?
In recent months, legislation was introduced in Congress to raise the dollar threshold before 1099-Ks are issued. For example, the Red Tape Reduction Act would set the reporting threshold at $10,000 — lower than in prior years but much higher than $600.
The AICPA endorses the legislation, which it said “balances the taxpayer’s need to effectively manage reporting requirements with the goal of improving tax enforcement.”
Reach the writer at russ.wiles@arizonarepublic.com.
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