Gig Workers: What’s Up with Form 1099-K?
- Wendy Bass
Feb 9, 2023
If you’re one of the millions of Americans who gets paid through one or more third-party payment networks — perhaps you’re an Uber driver, you rent your house through Airbnb, or you get paid through PayPal or Venmo for lawn maintenance — you will likely start seeing a new tax form show up in your mailbox next January.
It’s called Form 1099-K, and it’s been around for more than a decade. What’s changed is that the dollar amount that triggers the form is dropping precipitously. Starting January 2024, individuals who receive at least $600 in a calendar year through a third-party payment network will receive a Form 1099-K — and so will the IRS. That means an entire class of workers — the so-called “gig economy” — is facing a new tax reporting requirement.
What Is Form 1099-K?
So, at this point, you’re probably wondering, “What exactly is this new form, and how will it affect my tax situation?”
Form 1099-K is an information return — one of a class of forms the IRS uses to keep tabs on who pays what to whom. You might be familiar with other common information returns, such as Form 1098 (used to report the interest you pay on your mortgage), Form 1099-DIV (used to report dividends and distributions), and Form 1099-NEC (used to report payments for services performed by someone who is not an employee).
About a decade ago, the federal government introduced Form 1099-K to collect information on payment card transactions. In addition to banks and credit card merchants, who were required to use the form to report transactions of any amount, the new rule also tasked third-party payment networks (PayPal, etc.) with using the form to report payments that run through their systems — but only for those recipients who received at least $20,000 in payments from 200 or more transactions.
American Rescue Plan Lowers 1099-K Threshold — Then IRS Hits Pause
Take a look at the list of IRS information returns. You might notice that the prior 1099-K dollar amount far exceeds that for any other IRS information return. To close that gap, legislators included a provision of the American Rescue Plan Act of 2021 that went relatively unnoticed. It changed the reportable threshold amount to $600 in aggregate (in line with other information returns) and removed the number-of-transactions requirement.
The implementation date for the new reporting rules was January 1, 2022, which meant that millions of gig workers paid through these third-party apps were on the verge of receiving Form 1099-K for the first time this January.
But then, an eleventh-hour announcement hit pause, giving gig workers and the online platforms that paid them a little breathing room. The IRS announced it would treat 2022 as a transition period for the reduced reporting threshold. However, for years 2023 and beyond, payment apps will be required to report transactions with any participating payee that exceed $600 in aggregate.
Managing Taxes in the Gig Economy
Despite all this back-and-forth on information reporting requirements, one thing hasn’t changed: It is your responsibility to report all your taxable income, regardless of whether or not you received an information return. The IRS has made a clear point that gig work is self-employment income, even if it’s a side gig, part-time, or temporary.
If you earned any money through third-party payment apps, take advantage of this transitional year to get your ducks in a row. Here are a few key points to remember:
- All gig economy income is taxable — even if you don’t receive a Form 1099-K or other information return.
- Depending on tax limits and rules, you might be able to deduct expenses related to your gig work. Supporting these deductions requires good recordkeeping. Make sure to keep your business income and expenses separate from personal transactions, which leads us to the next point.
- Keep bill-splitting activities separate from sales of goods and services. Personal payments (for example, reimbursing a friend for your share of dinner) are not taxable, which is why some apps are starting to incorporate tags that allow you to designate a payment as either a gift or a payment for goods and services. (Make sure your customers know it’s OK to check the box that says it’s a business transaction.) Another option is to create separate business and personal profiles so the income and expenses are distinct. If you use a single profile for both, carefully check the amounts reported on your Form 1099-K to make sure business and personal amounts weren’t lumped together.
- Pay income taxes throughout the year. If your gig work is independent contract work (i.e., no one withholds income taxes from your pay), then you will need to make quarterly estimated tax payments. Or, if you have another job where you are considered an employee, you can cover the tax owed from your gig work by submitting a new Form W-4 to withhold additional taxes from your paycheck.
Making Your Gig Work for You
Gig work has many benefits. But remember that working for yourself also incurs new responsibilities — one of which is making sure you report and pay the appropriate taxes.
Being self-employed doesn’t mean you have to go it alone. If you have questions about small business taxation, reach out to your CRI advisor.