The IRS is making a big change that could affect gig workers, online sellers and more
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Starting Jan. 1, 2022, payment services such as PayPal, Venmo, Cash App and others will have to start reporting more detailed income data to the IRS.
Previously, these apps were only required to report accounts with more than $20,000 in commercial income per year, which was a pretty high mark to reach.
That benchmark was going to be lowered to just $600 per year starting Jan. 1.
However, after substantial objections over privacy concerns, a new proposal will adjust that figure to $10,000, excluding any paychecks already subject to federal income tax as well as social security and certain other benefits.
The rule will affect a wide range of businesses — including those who accept these types of payment services via online checkout or point of sale terminals.
Also likely to be heavily affected are self employed individuals, independent contractors and gig workers who get paid via one of these services.
In addition, the new rules could also “catch” many so-called “under the table” payments made in exchange for goods or services that are paid via these services.
People who sell on marketplaces such as Etsy, Amazon and eBay are also likely to be affected.
It’s also important for people to realize that, unlike most paychecks you get from employees, none of these apps withhold any income taxes from the money you get. It’s always been the responsibility of the recipient to account for any potential tax liabilities and plan ahead to be able to pay those taxes when they come due.
Many accountants recommend that individuals put aside a portion of their income in a separate bank account as money comes in so that they have the funds available to pay taxes on that income when April 15 rolls around — otherwise they could be left scrambling to come up with hundreds or even thousands of dollars that they pocketed directly and may have already spent.
Earners with more substantial incomes outside a traditional paycheck should likely consult with accountant to see if it might be worth setting up an LLC or other corporate entity to handle income because there can be tax advantages to doing so, though only a licensed professional can advise you on this.
In the U.S., most forms of commercial income are subject to income tax. It’s a common misconception that income from “side” jobs, online stores or when you’re not employee is not subject to income tax. That’s simply not the case.
Every penny of commercial income should technically be reported to the IRS. Of course, whether you pay taxes on the income — and at what rate — varies greatly and can often be significantly reduced or eliminated thanks to deductions. However, it’s still the law to report this money.
Exclusions to this rule would typically include reimbursements from friends or family, financial gifts up to the IRS limit and income from selling used items for less than you paid for them originally.
It’s not immediately clear how these apps will distinguish between those types of transfers and commercial ones — or how reliable that data will be.
Because these services will start feeding data to the IRS, the agency will be able to use computer software to “match up” the income you report on your tax return to the data it receives from external sources (most companies already do this when running payroll).
If those numbers don’t match up — you could be getting a call from the IRS.