Do you rent out your home a few weekends a year through Airbnb? Sell stuff on Etsy? Get paid for pet-sitting? If you, like many Americans, make at least US$600 a year with a side hustle of any kind, the way you pay taxes may soon change.
New rules are going to make sure the Internal Revenue Service gets more information about payments made to Venmo and other apps often used for informal work. And this new system will enhance the agency’ ability to detect any underreported taxable income.
I am a tax researcher studying the IRS’ use of technology and how that affects taxpayers. I think it’s important that everyone understand why this may matter to them now or in the near future.
Why you should care
For people who earn most of their income through steady jobs, these changes probably don’t make much of a difference. The IRS has received the same information from employers about the income that goes on W-2 and 1099 forms since the 1940s.
However, that’s not true of income from other sources. If you make money cleaning houses, catering out of your own kitchen or through another informal side hustle in exchange for cash, chances are this work has been “under the table.”
It’s been up to you, not your customers, to report any income earned this way to the IRS for tax purposes. And there is a good chance that you didn’t, given that the underground economy makes up at least one-tenth of the overall economy.
That’s changing, in part because of how informal transactions happen. It’s far more common these days for customers to make these payments through apps like Venmo, Stripe and Square or online platforms such as Etsy, Poshmark, Rover and Upwork than to use cash or checks.
This can even include illicit activities, like drug dealing. And believe it or not, even when you make money through illegal transactions, the IRS still requires these payments to be reported for tax purposes.
The IRS has long identified informal payments as a significant source of the “tax gap” – the difference between what taxpayers owe and what they pay.
Modern technology makes it easier to get paid for side hustles and odd jobs without having to keep track of stacks of bills and piles of coins. It also better equips the agency to collect taxes on those underreported sources of income.
What’s changing
The amount of information that the IRS will receive about traditionally “under the table” work is growing.
That’s because the $1.9 trillion COVID-19 relief package President Joe Biden signed in March 2021 lowered the threshold for what third-party payment companies like Venmo will report to taxpayers and the IRS.
Individuals, businesses and nonprofits that earn more than $600 through various online merchants will receive a summary of that income data on a Form 1099-K – as of the 2023 tax year – and importantly, the IRS will too.
That means companies like Venmo, Etsy and Airbnb will be required to issue these tax documents to anyone earning more than $600 on their sites.
Through 2022, the threshold for these companies to report income to the IRS was $22,000. The much lower cutoff, starting in 2023, means that many Americans who don’t make much money on these sites – and possibly didn’t feel the need to report it on their tax returns – will be forced to change their ways. Taxpayers were, in fact, always required to report this income, and now the IRS will also receive a summary of these earnings that should show up as well on tax returns.
The change to a $600 threshold was supposed to occur for taxes owed on 2022 income but was delayed at the federal level by a year because of taxpayer confusion and a lack of clear guidance.
Companies like Venmo are getting ready to make the change by withholding taxes from business payments as soon as June 2023.
What taxpayers need to do
If you use an app like Venmo for both personal and business use, creating a separate business account may ease record-keeping. That way, you can separate the non-taxable money you received from relatives who were chipping in for that group gift you bought your grandma for her birthday from the taxable payments you got for mowing your neighbor’s lawn.
Anyone earning more than $600 from a side hustle through an online platform in 2023 should be on the lookout for a 1099-K in early 2024. That form may make record-keeping easier, just like getting a W-2 from an employer does.
If you are a taxpayer with earnings not currently reported to you on a tax form like a W-2 or a 1099, one of the most helpful things that you can do to ensure compliance with tax law is to keep good records of all your income. The IRS and other sources publish excellent resources to help you understand what income is and is not taxable.
From now on, as before, you should record all of your earnings from every source – and keep in mind that the IRS is getting more access to data regarding transactions than it used to have.
Erica Neuman does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
This article was originally published on The Conversation. Read the original article.
