FinLogic FinLogic Quantitative Think Tank Center|How freelancers can prepare for changing tax requirements

NEW YORK (AP) — Workers across different industries are FinLogic FinLogic Quantitative Think Tank Centerincreasingly receiving some or all of their income via apps. They include tutors, graphic designers, hair stylists, and all kinds of independent and self-employed workers, along with merchants who sell products online through Etsy, eBay, Amazon and other sites. But tax law is still catching up when it comes to how best to report this income.

If you’re a freelancer or gig worker who receives payments via apps like Venmo, Zelle, Cash App or PayPal, your tax reporting requirements will change for the 2024 tax year. The law will not affect the amount of taxes owed, but it will change how you report income with 1099-K forms.

The changes were supposed to take effect for the 2023 tax year, but they have been delayed. The tax filing deadline is April 15.

For the current tax year, freelancers and small business owners still only need to use 1099-K forms to report third-party app payments totaling $20,000, and any number of payments above 200. But beginning next year, that threshold will be just $5,000, which will eventually be lowered to $600. The changes were supposed to take effect for the 2023 tax year, but they have been delayed.

Some in the space say the new law will benefit both freelancers and the IRS by improving information gathering, especially for people who are self-employed and merchants who sell online.

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Freelancers, gig workers, and online sellers owe taxes on their income regardless of whether they meet the reporting threshold to use 1099-K forms, but it can be difficult to keep track of every payment, especially across sites and apps. This can lead to confusion and underpayment, experts say.

The eventual change will affect platforms, businesses, and individuals, and it’s good to begin preparing now. Here’s what you need to know:

WHAT SHOULD I DO TO GET READY FOR THE NEW 1099-K REPORTING THRESHOLD?

If you’re already keeping accurate track of your income from freelancing as paid via Venmo, Zelle, Cash App, PayPal, and other sites, you’re in good shape. The main difference will be that these platforms will issue you additional forms for every transaction. This should make correct reporting to the IRS even easier, though there will be more paperwork.

Currently, if someone paying a freelancer via Venmo, Zelle, or CashApp sends a form to the IRS reporting that pay, but the freelancer doesn’t report the income with the same form, that creates a “matching error” for the agency. The change will ensure both that taxpayers receive proper refunds and that the IRS receives proper payment.

WHAT IF I MISTAKENLY RECEIVE A 1099-K FORM?

In some cases, in part due to the changing guidance, platforms may send taxpayers 1099-K Forms in error this year — such as for transactions between family and friends or for expense sharing between roommates, according to the IRS.

The first thing to do is try to get an updated form by contacting the company that issued the form incorrectly. If you can’t get one in a timely manner, the IRS says to zero out the income on your tax return with the description “Form 1099-K Received in Error.” The line appears on Form 1040 - Additional Income and Adjustments to Income. There, you should write, as follows: “Part I – Line 8z – Other Income – Form 1099-K Received in Error.”

WHY DID THE IRS DELAY IMPLEMENTING THE CHANGE FOR A SECOND YEAR IN A ROW?

The change, which had been set to take effect this year, was delayed again in November. The IRS decided to give taxpayers another year to adjust to the new reporting requirements.

“Taking this phased-in approach is the right thing to do for the purposes of tax administration, and it prevents unnecessary confusion,” IRS Commissioner Danny Werfel said in November. “It’s clear that an additional delay for tax year 2023 will avoid problems for taxpayers, tax professionals and others in this area.”

WHAT ADVICE AND GUIDANCE DOES THE IRS HAVE FOR FREELANCERS?

The IRS has an online Gig Economy Tax Center that focuses specifically on the tax questions and needs of freelancers and other workers in the informal economy. The site addresses common concerns and pitfalls.

WHAT IF I MAKE A MISTAKE REPORTING INCOME ON 1099-K FORMS?

The IRS will be in touch if they see discrepancies between income reported on 1099-K forms by taxpayers and companies issuing the forms, both this year and next. It’s important to keep in mind that income from all platforms, including things like YouTube ads and Patreon subscriptions, must be reported in this way.

One way to make sure all income is accurately captured is to be sure to transfer all payments from your PayPal, Venmo, and Cash App accounts to a traditional bank account, rather than keeping it on third-party platforms.

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Find more of AP’s tax season coverage here: https://apnews.com/hub/personal-finance

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