IRS Is Now Watching Side Gig Activities
Starting in 2022, the IRS will track people’s side hustle activities on transactions totaling $600 or more and/or 200 transactions. In prior years the reporting threshold was $20,000 and 200 transactions. It’s a significant threshold reduction that will affect many small business owners.
It is important to note that the new requirement does not really change anything from an accounting standpoint. Generally, income from gig work is taxable, however, some gig workers may have potentially avoided paying these taxes in the past, knowing they were unlikely to get caught if the IRS was not receiving reports about their gig income. With the new rule is now in effect, it means that there will be a higher tax bill for the same amount of revenue relative to last year, as many enterprises used to take advantage of the prior $20,000 reporting threshold. Unfortunately, they have lost that advantage due to the new reporting rules.
For example, Freelancers like fitness classes instructors, personal trainers, website developers, graphic designers, dog trainers, babysitters -just to name a few- That used to do these activities in addition to their daily jobs, are now under the radar.
E-commerce companies must report earnings
The reporting is related to any payments received for the sale of goods and/or services, not any non-business-related ones (i.e., family and friends related transfers). For example, Venmo, Etsy, Airbnb, and Paypal - among others - are required to issue 1099-K form to the IRS, reporting their business client’s total side gig activities for 2022.
Businesses/Gig workers should optimize their activities
Usually, hustle businesses don’t do monthly bookkeeping. They instead wait till the year-end to report transactions to their accountant for filing taxes. They may also only pay for the quarterly sales tax - if eligible.
So typically, entrepreneurs lose good opportunities to take necessary steps over the course of the year to get their business eligible for potential tax deductions.
However, now more than ever before, there is a need for small businesses/gig activities to maintain monthly bookkeeping and have a periodic discussion with a professional about their finances to minimize the already elevated 2023 tax bill.
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