New Tax Rule Targets Gig Workers

Unintended consequences?

But accountants are worried about unintended consequences, such as what happens with reimbursements between friends made on cash apps.

Let’s say you bought two tickets to a Taylor Swift concert, costing $800 each. Your friend reimburses you $800 for her ticket and sends you the payment via Venmo. Bingo — you’ve just exceeded the $600 threshold for transactions to generate a 1099-K form, and Venmo could be sending a 1099-K form to the IRS. In this case, you need to be prepared to report $800 as income on your tax return and $800 as an offsetting expense, and be sure to retain a record of the ticket purchase as backup, Harper said.​

“So the IRS by default, they don't know whether that was a reimbursement, if it was for goods and services. They don't know, so you have to report it. It's up to you to report it the proper way,” Harper said.​

IRS spokesman Eric Smith said he could not speculate on a situation like this and what the reporting guidelines might be when people file a 2023 tax return next year.

“We have been meeting with, and soliciting input from, interested stakeholder groups and that consultation process will influence what reporting guidelines will look like on next year’s return,” Smith wrote in an email. He added: “It’s possible that our guidelines may evolve or be refined as the year goes by, based on public input and other factors, but at this point, this is what they are.”​

Smith pointed to IRS guidance about 1099-K forms that states, “Money received as a gift or for reimbursement does not require a Form 1099-K. Taxpayers can minimize the chance of receiving one of these forms in error by asking friends or family members to correctly designate those types of electronic payments as a non-business-related transaction when possible.”​

Now let’s assume your friend can’t go to the concert. You sell her $800 ticket through Zelle for $900, snagging a $100 profit. Under the new rules, Zelle could send a 1099-K to the IRS, and you need to maintain records for your original purchase and the resale so you can show the IRS you made only $100 gain on the resale — which you must report — but not a $900 gain. If you sell the ticket for $700 and lose $100, you can’t deduct the loss, but still need to maintain records of the purchase and resale to demonstrate you did not make $700 income, Harper said.​

“Under long-standing tax law, profits from the sale of personal items are usually reportable and taxed, using favorable capital-gains rates,” Smith said”Unlike investors, losses are not deductible and can’t be netted against gains.

Keep good records

For freelancers, and anyone selling items online, it is crucial to maintain meticulous records and keep a ledger of every transaction made on payment apps.​ ​— “Everybody needs to become an accountant,” Harper said. “If you're buying, selling, trading, reimbursing, engaged in commerce, you should really look at Venmo, PayPal and Zelle as just like your bank account, and you should be tracking the money in and out.”​

Galstad-Lee recommends using an accounting system software, noting many can be inexpensive.

“At year-end, you don't have to put those things in Excel or add up the numbers on your calculator,” she said. “If you have a system that captures all of those things in one place, that makes your life a little bit easier.”​

Also, try to use one payment app to help make record-keeping more manageable, Harper advised. But if you are a freelancer or gig worker, you will likely be paid through whichever method or app each of your clients prefers, he said.​

In January, taxpayers should check that third-party payment processors did not make mistakes on their 1099-K forms — another reason to maintain good records, Galstad-Lee said. If the amounts reported on the 1099-K are higher than what was received, the payee is responsible for getting the form corrected and must ask the issuer to fix the error.​

The new rule was supposed to take effect for the 2022 tax year. But in December, the IRS announced it was delaying implementation of the new $600 reporting threshold, pushing it to the 2023 tax year. The IRS said the delay would help reduce confusion as people filed their 2022 taxes and give taxpayers more time to prepare and understand the new reporting requirements.​

“The change under the law is hugely important because tax compliance is higher when amounts are subject to information reporting, like the Form 1099-K,” the IRS said in a press release in December. “However, the IRS noted it must be managed carefully to help ensure that 1099-Ks are only issued to taxpayers who should receive them. In addition, it's important that taxpayers understand what to do as a result of this reporting, and tax preparers and software providers have the information they need to assist taxpayers.”​

The bottom line during this calendar year is to be aware of this change and to track your transactions throughout the year to avoid trouble.​

“Everybody was under the illusion that nobody was watching, and now they're watching,” Harper said. “It's a lot easier to track it as you go than trying to recreate it a year, two years later, when the IRS is on you. And remember, you don't want to be that person where you're not reporting and doing your taxes properly because it's just not worth it.”