If You Have a Side Hustle, Be Advised: The IRS is Cracking Down
For several years now, the IRS has required payments made to merchants through various marketplaces, payment processors (credit & debit cards), and third-party settlement organizations (TPSOs) to be reported on Form 1099-K. The purpose is to uncover merchants that do not include all of their income by comparing the 1099-K amounts to the amount reported on the individual's or business's tax return and following up with the under-reporters by correspondence or audit.
In the past, the filing threshold for 1099-Ks was when the gross amount of total reportable payment transactions during a calendar year exceeded $20,000, and the aggregate number of transactions for that payee in that year exceeded 200. Thus, entrepreneurs with a small side hustle selling merchandise on the Internet directly or through Amazon, eBay, and others may not have received a 1099-K in the past.
That will all change beginning in January 2023 when reporting begins for 2022 transactions since the American Rescue Plan Act of 2021 included a provision to reduce the reporting threshold to $600, effective in 2022. Also impacted by this reduced threshold will be homeowners who rent out their vacation homes through Airbnb and VRBO, who generally avoided 1099-Ks in the past because of the 200-transaction threshold. Also, individuals providing services through Internet websites such as delivery, babysitting, companionship, home cleaning, elder care, and other services seldom met the $20,000 threshold and have not received 1099-Ks in the past.
The 1099-K only reports gross income. The cost of the products sold and other business expenses can be deducted to determine a merchant's net taxable profit. Those renting vacation homes through TPSOs can deduct depreciation, utilities, repairs, and other costs, while those providing services can deduct certain travel and other expenses. The net profits are subject to income tax and are generally subject to self-employment tax, including rentals where significant personal services are performed.
Thus, keeping records of expenses becomes essential. Don't hesitate to contact this office for further information about your specific side hustle and what expenses will be deductible.