If you are a freelancer, or pick up extra income via a side business or small enterprise, then chances are that you are familiar with the 1099-NEC (formerly 1099-MISC) or a 1099-K tax forms. These forms are distributed by clients, customers, businesses, or third party payment processors to freelancers who performed any sort of job over the past year which resulted in $600 or more of income.
Well, in the year 2022, there will be a big change to how this income is reported. Stemming from “The American Rescue Plan Act of 2021,” this new tax change significantly modifies the reporting threshold associated with Form 1099-K, and may change how you do your taxes when the 2023 tax season rolls around.
So how does this alteration affect freelancers, and what should you know going forward? Here’s a closer look at the changes ahead.
The New Rules for 2022
“Form 1099-K, Payment Card and Third-Party Network Transactions” is a form that tracks payments made to freelancers via a third-party payment orchestrator, such as credit cards, apps like Square Cash or Venmo, and online payment service providers like PayPal and Stripe. This form also includes websites and platforms that facilitate freelance jobs and connections, such as Upwork and Uber. Essentially, if you perform a job for a client, and are not paid directly by the client but by a third party instead, form 1099-K comes into play.
Up until 2021, Form 1099-K was only sent to payees who received third-party network transactions that, in total, exceeded $20,000 and 200 transactions for the year. Starting in 2022, this threshold has drastically dropped from $20,000 to $600, with no minimum number of transactions required. As such, if you are a freelancer, there is a big chance that you’ll be receiving a 1099-K form for the first time from your clients at the end of the year.
The Reasons for the Change
One of the biggest reasons for this drastic change is simply because of the rising popularity of the side gig market. During the pandemic, many Americans started to find new sources of income, whether it was from picking up freelance jobs on the side, or by selling goods and services on third-party platforms such as eBay, Etsy, or Poshmark. There has been a reporting requirement for third-party network income since 2012, however, because many freelancers did not receive a Form 1099-K unless they exceeded the $20,000 threshold, a large chunk of this income has gone underreported. Lowering the threshold to $600 creates more accountability, and increases voluntary tax compliance.
How these Changes Affect you as a Freelancer
In result of this change, which takes effect in 2022, it’s more important than ever to track your expenses if you plan to do any sort of freelance work during the year. Keep in mind that your 1099 forms only report the gross income and do not include any taxes, so you’ll need to track and report your business expenses to keep your annual taxes as low as possible.
A Few Things to Keep in Mind
- There’s a difference between a hobby and a business in the eyes of the IRS. If income that is generated from the sales or services you are providing is not depended upon for your livelihood or if the activity is not carried out in a businesslike manner (maintaining accurate books and records) the activity could be considered a hobby. What that means for you is that the income must be reported, but unfortunately expenses can’t be included. As such, it’s best to manage any freelance affairs as a business, instead of a pastime.
- Keep tabs of your home office expenses! If you work from home, any upgrades or repairs made to your office – or your entire house – can potentially be deducted.
- Utilities may also be deducted if you perform all of your work from a home office. This includes expenses such as internet, electricity, and any services that you utilize every day to do your work.
- Also, keep track of mileage required for travelling for your freelance work, (such as attending a craft show), as well as expenses directly related to your side business, from meals with clients, to restocking your paper and pen supply.
Our Tax Professional are Here for You
The best way to be prepared for all of the changes in 2022 is to work with a tax professional. Waters Hardy & Co, P.C., has the resources and expertise required to help you navigate the challenging arena of freelance income, as well as any new tax scenarios that may have come into the picture during the COVID-19 pandemic.
Contact us today to discuss how your bottom line may be affected with the new changes to 1099-K, and we’ll work with you to ensure that you’ll be perfectly prepared when it’s time to file in 2023.