Let’s Talk About How It May Affect Your Taxes A new tax reporting rule on third-party payments above $600 is queued up to go into effect starting in 2024. This controversial rule has people divided.
People Earning Money Online are in for a Brutal Awakening Relating to Their Taxes
Americans who make a living online, having narrowly escaped a major shock in relation to taxes on their income earned via 3rd-party payments, are gearing up to feel the impact of a new tax reporting rule that went into effect this year.
The Internal Revenue Service (IRS) released the news in November that they were delaying the onset of the new, very controversial, tax reporting requirement that effectively targets Americans who made more than $600 online via third-party payment applications such as PayPal, Venmo, and Cash App.
Democrats approved this rule change back in March 2021 with the passing of the American Rescue Plan. This plan states that payment platforms and online selling marketplaces, which include sites such as Etsy, Amazon, and Airbnb, are required to send Form 1099-K to the IRS and self-employed individuals if their transactions totaled $600 or more over the course of the tax year. Even if they received one lump sum payment of at least $600, it will qualify for this tax reporting rule.
This is a major departure from the typical tax reporting rule, which only required taxpayers with significantly higher payment and transaction amounts to receive a 1099-K. Previously, you would have had to exceed $20,000 and have more than 200 business-related transactions within the year. It is estimated that the lowered threshold will require 30 million more 1099-K forms to be sent to the IRS than in the previous year. A vast majority will be for people who have never received a 1099-K in past years.
Luckily for Taxpayers Gearing Up to File Their 2023, They Can Wait Until Next Year to Deal with the $600 Rule
The IRS has decided to treat 2023 as a transitional year due to concerns that there needs to be more clarity for online sellers and payment processors to follow through this year. Business owners are already required to report their income to the IRS, so the new rule ultimately means that the IRS will be able to figure out which business owners earned on third-party cash applications.
So, what does this delay mean for you?
Instead of beginning to enforce the $600 rule for the 2023 tax year, the IRS will push off the new threshold until the 2024 tax year. Third-party payment and selling platforms will not yet be required to report 2023 transactions on a 1099-K for sellers that fall below the previous threshold of $20,000.
“Given the complexity of the new provision, the large number of individual taxpayers affected, and the need for stakeholders to have certainty with enough lead time,” says a rep from the IRS. To help ease the transition to the drastically lower reporting threshold of $600, the IRS plans to slowly phase into it by planning a $5000 limit for the 2024 tax year.
What Actually Qualifies as Income for the “$600 Rule”?
With the announcement of the $600 threshold for online payments, people were floored by the major changes they would face. Many people receive payments via third-party platforms that would now trigger this reporting, which they previously may not have dealt with.
It is important to note that this rule only applies to payments that are received in exchange for goods and services. If you are using PayPal and Venmo to share money between family and friends for gifts or to reimburse them for things such as shared dinners or rent payments, then you are not required to report this as income.
Another noteworthy exception to the rule is the sale of a personal item at a loss. For example, if you bought a designer bag for $500 but then sold it at a loss for $200 on Poshmark, that amount is not taxable.
Is Your Side Hustle Hurting Your Chances for a Return?
The onset of the pandemic-era led to many people finding themselves out of work, working from home, or just generally spending far more time at home than they had in years past. With this newfound free time, many folks picked up side hustles to help them earn some extra income.
Many of these side gigs involve folks operating as independent contractors, receiving their payments via third-party applications. Whether they are selling their handmade crafts on Etsy or eBay, driving for Lyft or Uber, or delivering food and groceries for Doordash and Instacart, these individuals are considered self-employed and must, therefore, deal with the tax implications that come with it.
The intention of this new tax reporting rule is to crack down on people who are evading taxes by not accurately reporting their full gross income and increase tax compliance. Once implemented, the lower threshold for reporting income from third-party payment platforms is estimated to uncover millions of Americans who make their money online.
Roughly one out of every four Americans engages in a side hustle by earning extra cash online. People who are critical of the new rule believe that the government is overreaching and will ultimately harm small businesses and disproportionately burden some taxpayers.
Tips for Tax Deductions Which May Help Offset the New Rule
Filing taxes for self-employed individuals can be challenging, as many people are unaware of the rules in place that benefit them. Here are a few overlooked deductions that may help you level out your return this tax season in the wake of the new reporting rule:
Tax Deduction for a Business Vehicle
This deduction does not only apply to Uber and Lyft drivers. Any self-employed individual can claim this deduction if they make deliveries, drive to meet clients, or use their vehicle for any business-related purposes.
Write-Off for Social Security Taxes
Self-employed individuals pay a special 15.3% tax instead of having payroll taxes taken out automatically like “regular” employees. This includes a 12.4% Social Security tax and 2.9% for Medicare tax. You may be able to write off half of the self-employment tax you pay for Social Security with your standard deduction.
Home Office Tax Deduction
Whether you are a fully self-employed worker, or you are a freelancer in addition to a full-time job, there is a chance you may be eligible to claim a deduction for your home office. If you meet the requirements, you may also be able to deduct part of your utility expenses and insurance costs.
There are many other possible deductions for self-employed workers that may help you ease the sting from the new $600 tax reporting threshold rule. Take this knowledge with you into 2024 to maximize your return.
