Freelancing, Income Reporting and the IRS: What Every Filer Needs to Know

If you are a member of the gig economy or a freelancer, you will be receiving a new tax form next year, one that probably has not graced your mailbox until now. Beginning with the 2022 tax year, payment processors such as PayPal, Venmo, and Stripe will be required to issue a 1099-K form to anyone with $600 or more worth of transactions. This has many people very confused.

Until now, the 1099-K form was only issued to individuals who earned considerable amounts of money and completed a large number of transactions. Large-volume sellers on eBay, for instance, have been receiving this form for years, and they have grown used to the accounting requirements and tax implications it created. For the majority of freelancers and gig workers, however, the 1099-K is a new requirement, and one they need to prepare for now, before the next new year rolls around.

Much has been made of the upcoming changes to income reporting requirements, and how those changes will impact freelancers, gig workers, and the self-employed. Given the aggressive timeline of the changes and the fact that they were not well advertised, there is a great deal of misinformation floating around, and that makes getting the facts quite difficult.

If you are working as a freelancer or participating in the gig economy, you will want to take note of these changes and learn about the many ways they might affect you and your finances. The good news is the changes are relatively straightforward and easy to understand. Here are some of the key takeaways:

Nothing Has Really Changed

Perhaps the first thing to understand about the new reporting requirements is that nothing in the tax code has actually changed. Freelancers who are paid through services like PayPal and Stripe have always been required to report their earnings to the IRS, and those who failed to do so did so at their peril.

Whether or not you receive a 1099-K, 1099-MISC, or 1099-NEC, you are still required to report all your earnings, including those from freelancing and gig work. The only thing new is that PayPal and its competitors are now required to issue a 1099-K for users who reach a minimum of $600 in earnings, a significant shift from the previous, much higher, threshold.

They Are Aimed at Business Use, Not Personal

Some of the misinformation surrounding the reporting change has focused on payment facilitators like Venmo. Some people are under the mistaken impression that all of their transactions are about to be taxed. That is definitely not the case, and these reporting requirements are aimed at business owners and freelancers, not individuals paying for a cup of coffee or diners splitting the bill at the local restaurant.

The reporting requirement only kicks in once individuals reach the $600 level. If you are paying your friend back for a $20 Uber ride or splitting a $100 tab at the local restaurant, chances are you will never reach that threshold. Even if you do, the odds you would owe tax on those clearly personal transactions is slim to nonexistent.

Accounting Could Get Easier

No one likes dealing with the IRS, and the idea that the tax agency knows exactly how much they earned has many freelancers and gig workers running scared. And while there is no doubt that some level of intrusiveness is at play here, in the end, the issuance of those 1099-K forms could actually make small business accounting easier.

Instead of spending weeks tracking down reports and adding up columns of numbers from disparate sources, freelancers and members of the gig economy can simply wait by the mailbox. Armed with a 1099-K from each payment processor they used, they can report their income quickly, and more importantly, accurately.

Setting Aside Money for Taxes Will Become More Important

It’s safe to say that the vast majority of seasoned freelancers and gig workers have been reporting their earnings accurately all this time, and for those folks, little will have changed. For newer entries to the freelancing community, however, the shock of the 1099-K reporting requirements could be significant, and that will make putting money aside for taxes even more critical.

Once the new 1099-K reporting requirements take effect, the IRS will know how much those freelancers and gig workers have earned, and more importantly how much tax they owe. Those who have not set aside money for the bill could find themselves in an uncomfortable, and potentially very expensive, situation.

You May Want to Start Making Quarterly Payments to the IRS

Last but not least, the upcoming changes mean that all freelancers and gig workers, even those with full-time jobs, may want to start making quarterly payments to the IRS. Full-time freelancers and small business owners have been making these payments all along, but new freelancers with limited earnings may not have been.

If you think you will owe more than $1,000 to the IRS come tax time, it pays to make additional payments to cover the bill. If you fail to think ahead, you could end up with not only a big tax bill come April 15 but additional penalties and interest as well.

If you work a full-time job and freelance on the side, you can ask your employer to withhold additional taxes from your paycheck. This extra withholding could allow you to avoid the hassle of writing those quarterly checks — just make sure the amount is sufficient to cover your expected tax bill.

There you have it — the rundown on the upcoming income reporting requirements for freelancers and those participating in the gig economy. When the 2022 tax-filing season rolls around in early 2023, those workers will receive a brand new tax form, one dubbed the 1099-K. That form will detail their earnings, and a duplicate copy will go to the IRS.

Now that you know what to expect, you can start making your plans. No one likes to deal with the tax agency, but having the facts will make your life a little easier and make tax filing season less stressful.