(Art Credit: Sisi Recht)

What better way to fund your next big freelance endeavor than through crowdfunding? All it takes is a little effort on your part and you can rake in some cash “gifts” and “goodwill contributions'' to help you move your vision forward, right? While this is true from a purely business development perspective, what isn’t true is that the money you bring in is tax-free.

In fact, the IRS views any crowdsourced funds the same as any other business or personal income. As a result, you will be taxed on it. In fact, if you are using a crowdfunding platform such as Kickstarter, GoFundMe or other platforms, they are required to report the earnings you have acquired using their services.

The IRS recently lowered the threshold for crowdsourced funds to be reported to just $600.

As of December 31, 2021, is that the thresholds that the IRS has set for these platforms to issue and file Form 1099-K, Payment Card and Third Party Network Transactions, with the IRS has been lowered very significantly. Prior to this date the IRS only required the 1099-K to be issued if a recipient raised $20,000 or more on a crowdsourcing platform. Now the threshold is a mere $600 and there is no minimum for the number of transactions required to trigger the reporting requirement.

Prior to this year, the threshold for a crowdfunding website or payment processor to file and furnish a Form 1099-K was met if, during a calendar year, the total of all payments distributed to a person exceeded $20,000 in gross payments resulting from more than 200 transactions or donations.

This means that if you are doing any meaningful level of crowdsourcing of funds for your freelance business, you are likely going to receive a copy of Form 1099-K from the platform you use. Keep in mind that any business income related to funding your projects is still taxable income and it needs to be reported as such.

The importance of keeping complete and accurate records of all crowdfunding reporting cannot be overstated and these records should be kept for at least three years.

Crowdfunding dollars may be excluded from the IRS reporting requirements, if these rules apply.

There are some exceptions to these new crowdfunding reporting rules which are laid out in The American Rescue Plan Act: a crowdfunding website or its payment processor are not required to file Form 1099-K with the IRS or to furnish it to the person to whom the distributions are made if the contributors to the crowdfunding campaign do not receive goods or services for their contributions.

However, if you raise a pool of funds and then distribute them to businesses and individuals who gave them to you as the crowdfunding organizer, you will receive a copy of Form 1099-K from the platform you used because that is still considered taxable income.

The distinction must also be made when you distribute the money raised to individuals or businesses not related to the source of solicited funds. In this situation, you are not required to report this as taxable income (as it is viewed as a gift or charitable contribution). Be warned, however, you will have to document it appropriately that these funds were indeed gifted and not part of your taxable income.

You can also deduct the eligible amounts of the proceeds spent to develop your concept similar to other business activities and expenses. Again, beware of the specific rules regarding this and track all of your activities and expenditures to satisfy the IR requirements.

Take care when crowdsourcing to avoid tax surprises for you and your freelance business.

Just like any other source of income, crowdfunding money must be accounted for, tracked and reported to the IRS. If you are starting to get into more crowdfunding activity in your freelance business now is the time to make sure you understand these new reporting requirements and you can take the appropriate steps to comply with the IRS regulations.