(Art credit: Kathryn Sheldon)
Do you use apps like PayPal, Venmo, or Square to accept freelance business payments? If so, you’ll need to pay close attention to the new tax reporting changes affecting these platforms that go into effect this month, especially if you do a significant amount of business through them.
In an effort to reduce the amount of unreported taxable income from these payment platforms, the IRS is now requiring digital payment app businesses to report, on a Form 1099-K, each of their user’s business transactions (defined as a payment for a good or service). Given that the threshold for reporting was previously 200 transactions per year with a combined total of gross payments of at least $20,000, this may have serious consequences for freelancers who have not reported this income either inadvertently or by conscious choice during past tax years.
To this last point, the new reporting requirements are not changing the basic tax responsibilities of every freelancer to claim all of the taxable income they receive from clients and other sources, including tips, on their tax returns regardless of whether the payer has sent the information to the IRS.
In addition, this change does not affect personal, nonbusiness transactions. For example, if you receive payment for a meal you shared with friends via Venmo, you do not need to report that payment.
Transparency into payment platform transactions means freelancers should be proactive in reporting their related income. The top takeaway here is that the IRS is going to have a much clearer picture of the flow of payments that freelancers and other businesses are receiving from these platforms. This means that if you haven’t been reporting all of the income you receive through these apps, you need to start now.
If you use payment apps for non-business transactions and you receive a 1099 from one of these platforms, be prepared to clarify your activities with the IRS. In addition, there may be a chance that some of your activity is reported twice or inaccurately since all of these reporting requirements are new. Check carefully the 1099s you get from payment apps you use and those you receive from clients who are using them to pay you. This is another situation where you may need to explain to the IRS that the two 1099s are for the same transaction.
For now, the most important thing for freelancers who are using these apps to conduct business to do is keep meticulous records of all transactions. It is up to the app providers to implement the rule change using the means they deem effective. Be on the lookout for any notices you receive from the platforms you use in case you need to provide tax information beyond what you may have done when you initially set up your account.
Some other notable tax updates for freelancers include these 2022 tax due dates and changes to income thresholds for marginal tax rates and deductions:
· January 18, 2022 – Deadline for Q4 2021 estimated tax payments
· January 31, 2022 – Deadline for clients to send freelancers their W-2 or 1099-NEC/1099-MISC forms
· March 15, 2022 – Deadline for partnership tax returns (and LLCs that are taxed as a partnership) as well as S-corporation tax returns
· April 18, 2022 – Deadline for 2022 Q1 estimated tax payments. It’s also the deadline for C-corporation, sole proprietor (businesses you report on a schedule C), and individual tax returns. If you file an extension for the deadline, the Individual Tax Return Extension Form is due on April 18, too.
· June 15, 2022 – Deadline for 2022 Q2 estimated tax payments
· September 15, 2022 – Deadline for 2022 Q3 estimated tax payments
· October 17, 2022 – Deadline for 2021 individual tax returns that received a filing extension
Given the rise of the Omicron virus and potential next wave of the COVID pandemic, there could be changes to these due dates as there have been in the past several years if the IRS determines this to be necessary. Stay tuned!
· The standard deduction:
· For married couples filing jointly for tax year 2022 rises to $25,900, up $800 from the prior year.
· For single taxpayers and married individuals filing separately, the standard deduction rises to $12,950 for 2022, up $400, and for heads of households, the standard deduction will be $19,400 for tax year 2022, up $600.
· 2022 marginal tax rates:
· The top tax rate remains 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly).
· 35%, for incomes over $215,950 ($431,900 for married couples filing jointly);
· 32% for incomes over $170,050 ($340,100 for married couples filing jointly);
· 24% for incomes over $89,075 ($178,150 for married couples filing jointly);
· 22% for incomes over $41,775 ($83,550 for married couples filing jointly);
· 12% for incomes over $10,275 ($20,550 for married couples filing jointly).
· The lowest rate is 10% for incomes of single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly).
- For 2022, as in 2021, 2020, 2019, and 2018, there is no limitation on itemized deductions, but you should weigh itemizing against the benefits of taking the standard deduction noted above.
- The tax year 2022, the maximum Earned Income Tax Credit amount is $6,935 for qualifying taxpayers who have three or more qualifying children, up from $6,728 for tax year 2021.
With the changes made by the IRS to payment app reporting requirements, the continuing crypto currency crackdown, and the above changes to marginal tax rates, and other tax thresholds, 2022 is shaping up to be a year where freelancers need to pay close attention to keeping their reporting up to date and being aware of new tax obligations coming this year.
Checking in with your tax professional now can help you navigate these changes and make sure you are on track with your current and future freelance business taxes.
Jonathan Medows is a New York City-based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He provides tax, accounting, and business articles for freelancers on his website, http://www.cpaforfreelancers.com, which also features a free newsletter, blog, and comprehensive freelance tax guide.