From Yahoo Money — By Martha C. White —
As inflation continues to pinch Americans’ budgets and labor demand remains high, it’s likely more people will look to supplement their income — and the tax man is starting to take a much closer look.
For now, things remain pretty much as they were. On Dec. 23, the IRS announced a one-year delay for implementing a new reporting standard. This now goes into effect with tax year 2023, rather than potentially ensnaring gig workers who were unaware of the looming change.
Previously, the threshold for 1099-K reporting was 200 transactions with a total value of more than $20,000. In the past, earnings beneath that amount might have flown below the IRS’s radar.
The American Rescue Plan Act of 2021 sharply lowered that $20,000 floor. The new IRS reporting protocol directs third-party payment networks like PayPal, Venmo and CashApp to generate 1099 forms for any users who receive more than $600 in gross payments — and any number of transactions — over the course of the year.
The IRS clarified that using services like Venmo for person-to-person payments are not subject to taxes, but users of these services — as well as some lawmakers and tax policy pros — had expressed concern that the burden would be on taxpayers to prove that transactions between friends to, say, split vacation expenses shouldn’t be classified as income.
Big changes deferred, but coming soon
Tax experts warn that overlooking what you owe the IRS (and potentially your state) can lead to a surprise tax bill and possible penalties when April 2024 rolls around. “That income is essentially business income. You’re considered self-employed, so you do have to pay tax on that,” says Timothy Steffen, director of tax planning at Baird, an investment firm.
If this is your first year dipping your toes in the gig economy, you might receive one or more 1099 tax forms, which is how the IRS records non-employee income. There are a few kinds: 1099-MISC, 1099-NEC and 1099-K. Which kind you get depends on the nature of your work, how you get paid and the amount you earn.
Regardless of the version, the advice remains the same. “If this is the first time you’ve gotten a 1099, don’t ignore it, because whatever you get, the IRS gets,” Steffen says.
If you don’t get a 1099, that doesn’t mean you’re off the hook. Hypothetically, if you work for several ride-share and food-delivery services and earn just a few hundred bucks from each, you might not receive 1099s — but you still have to report that income, as well as pay taxes on it.
Even if you’re a W-2 wage earner, you might still be required to report extra income from selling tickets through StubHub.
“Whether a 1099 is sent to you or not is immaterial because you, as a taxpayer, are still responsible to report the income,” says Craig Wild, partner at the accounting firm of Wild, Maney & Resnick.
Why gig work is taxed so differently
Even if you have a regular, full-time job, the IRS considers your gig work self-employment, which carries with it a whole different set of tax implications than if you only worked as a salaried or hourly employee. The Gig Economy Tax Center on the IRS website is a good starting point if you’re new to the 1099 universe.
As a self-employed worker, you’re responsible for payroll taxes as well as income tax. If you’re an employee (i.e., you get a W-2 every year), you might not even pay attention to the difference between these taxes, which fund Social Security and Medicare, and are officially called Federal Insurance Contributions Act or FICA taxes, and regular income tax your employer withholds from your paycheck.
But FICA is technically a separate tax category, and the difference matters to self-employed workers, since FICA tax obligations are split between you and your employer. If you’re in business for yourself, this means that you’re responsible for both the employee and the employer portion of these taxes. “What I normally tell my clients is to take one-third of your gross [income] and throw it in a tax account,” Wild says. Ideally, that amount should be enough to cover your taxes as well as give you some money you can put into a retirement account.
How you should be prepping now
Accountants say it’s all too common for people to overlook small amounts of income — but even minor supplemental income can become a major headache if you aren’t prepared. Ignoring the tax implications of your gig work means you could find that your next tax refund is smaller than anticipated — and that’s a best-case scenario. Worst case: Finding you owe taxes plus interest and penalties for not making those tax payments over the course of the year.
If you’re a gig worker, this one-year delay gives you a window of opportunity to implement good accounting practices. Here’s what experts say you should be doing now if you plan to supplement your earnings with gig work in 2023 and don’t want to run afoul of the IRS.
Keep good tax records
Tax pros can’t say enough about the importance of keeping tabs on different streams of income. (This will be most pertinent for people that do gig work across multiple platforms or apps.) Documenting your earnings — where, when, for whom and how much — will help immensely to streamline the filing process.
A bonus: Since self-employment means you can deduct eligible business expenses if you itemize your taxes, good record-keeping will make it easier to do so. You should keep a detailed log of what you spend on expenses like home office equipment and supplies, as well as mileage if you earn your gig income behind the wheel.
“Have a good spreadsheet or a log for your mileage. The IRS wants you to have a record of your travel,” Steffen advises.
Know what you owe
If you entered the gig economy this year, heads up: You probably already owe taxes. If you don’t realize this, you could find that your next tax refund is smaller than anticipated — and that’s a best-case scenario. Worst-case: Finding that you owe taxes plus interest and penalties for not making those tax payments over the course of the year.
To figure out if you need to start making estimated quarterly payments now, Steffen suggests using an online tax prep tool to create a “dummy return” for this year’s taxes using the same parameters you used for last year’s taxes, but with your gig income included as well, to give yourself an estimate of your tax obligations.
The “old” 1099 reporting in place for tax year 2022 might not reflect this, but if you earned the income, you owe the taxes. “As soon as you start having this other income that doesn’t have withholding on it, you may have to begin making separate estimated payments,” Steffen says.
Continue reading at Yahoo Money.
Contact Pinnacle CPA Advisory Group
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