If you are collecting payments for your freelance business via third-party payment networks such as Airbnb, Etsy, PayPal, and Venmo it’s time to make sure your payment records are up to date so that you don’t run into issues when filing your 2022 tax return. The IRS has been scrutinizing transactions on these platforms since 2021 as part of the American Rescue Plan Act that was signed into law that year and will again be issuing 1099-K forms to any taxpayer who received more than $600 through these apps for business purposes.
If you have both personal and business transactions running through these apps, you will need to make sure you have these segmented appropriately and to make sure that there is no co-mingling of expenses occurring. This will make it easier to determine if the 1099-K form you will receive early next year from the IRS is indeed accurate (if you would like more detail check with your tax professional after reviewing Form 1099-K, its instructions and these frequently asked questions on IRS.gov).
This new reporting requirement for third-party settlement organizations (TPSOs) requires payment apps to report goods and services transactions made by users with $600 or more in annual gross sales, regardless of the total number of transactions, on 1099-K forms. This lower threshold is significant in comparison to the previous guidance which allowed users to have $20,000 and 200 transactions or less from selling goods and services in one year without having to report them as taxable.
Will you get a 1099-K form for reporting on your freelance tax return? Get the facts:
If you aren’t sure if you will receive a 1099-K for your freelance business transactions, the following tips can help you determine if this 1099-K reporting threshold applies to you, however, remember that you need to report all freelance business income on your tax return no matter where it is derived from:
- If you received payments labeled as “goods and services” from one or more TPSOs in the amount of $600 or more you will receive a 1099-K because these apps have separate accounts allowing users to identify which of their transactions are for goods and services. These are the only transactions labeled as such will be considered for the 1099-K form.
- While there is no change to the taxability of income, you must report all income, including that from and freelance part-time work, side jobs or the sale of goods.
- Be sure to report all income on their tax return unless it is excluded by law, whether they receive a Form 1099-NEC, Nonemployee Compensation; Form 1099-K; or any other information return.
- Taxable and nontaxable income is further explained on IRS.gov at Understanding Your Form 1099-K.
The IRS emphasizes that money received through third-party payment applications from friends and relatives as personal gifts or reimbursements for personal expenses is not taxable.
Make sure to factor in any income from third-party payment platforms in your estimated tax payments at the federal, state, and local levels.
Just like any other income, you must pay tax on the money you earn or receive from activities occurring on TPSOs throughout the year, either through withholding or estimated tax payments.
If these payments are in addition to a W-2 job or pension, and your tax withholding for these income streams is not enough, you will need to make additional estimated tax payments.
Proper recordkeeping is paramount for all income including that on a 1099-K
Just like any taxable income, you will need to ensure that you are keeping meticulous records of all the transactions you are facilitating on these third-party payment platforms, this will help protect you in the case of an audit and also enable you to have the most accurate picture of your freelance tax obligations and revenue generation from your hard work.