"This law should not impact your overall business, unless you're conducting under the table transactions on the reg, which I've already mentioned, is not so legal, the IRS law states that you have to report all income for your business."
There are new tax rules for 2022 gig workers collecting income through payment settlement entities (PSEs) and third-party network transactions such as Paypal, Venmo, and Zelle. The threshold for income reporting has dropped substantially, which will have a ripple effect on freelancers, odd jobs and selling used items. In this episode, I'll break down my first impressions on the 1099-K and its impact on gig-workers.
Support the show (https://www.buymeacoffee.com/artrepreneurs)
Michael Der 0:04
You are listening to Artrepreneurs a podcast that inspires photographers and visual artists to live their best creative lives. My name is Michael der I am your host and a full time photographer here to give you some tools so you can build your life and creative self employment. Beyond that I get to sit down with an amazing community of creative professionals to talk about process business, and the lessons that have helped them grow. So let's get to it. Artrepreneurs Season Two kicking off next.
All right, welcome back to the show. Thank you so much for joining me today. I am Michael der I'm your host, thank you for tuning in to Episode 55 of Artrepreneurs in season two. So we're very excited about that. Now, I wanted to dive right into this topic, because there's actually a lot of pushback going around about this new rule for 2022. Okay, so there's a lot of people riled up about this. So I'm going to try to unpack this issue just a little bit, and see what it means for you and me as freelancers.
Alright, so our favorite uncle at the IRS, you know, Uncle Sam, he's been getting pretty busy. Alright, so he's enforcing a slightly stricter income reporting compliance policy. Now, this is not a major disruption to the current tax laws. But it is notable, and that's why I want to bring this up today. So what the IRS is effectively doing is they're implementing a significantly reduced threshold for reporting requirements through apps and third-party payment networks, like your pay pals, your Venmo, yourself and your cash apps. Okay. So for those of you who collect money through these platforms, as I know a lot of you do, stick with us, I'm going to break this down as best as I possibly can. Obviously, I am no legal expert. I'm no tax professional, this is really just going to be a first impression on this blockchain for my end, and hopefully, whatever I do uncover inspires you to follow up with more in-depth research on your own time. So let's get to it.
Venmo, Zelle, PayPal and the 1099k. So what is a 1099k? Alright, so first of all, let's break down the purpose of a 1099 form in general. So a 1099 tax form is what reports non employment income to both the worker and the IRS. So it's going to tell you how much taxable income you earned throughout the year, and ultimately, how much money you need to report on your 1040, also known as your schedule C. So if what you report does not match up with what the IRS receives, then you're going to be subject to investigations. Okay. So if you report $20,000 of income, but the IRS received 1099, that add up to let's say, $25,000 of income, then you're in trouble, you're going to need to explain where that extra $5,000 has gone. Alright, so effectively, 1099 acts as a double-check method to verify that your income is accurate, and there are tons of different 1099 all labeled differently based on the type of non-employment income. And so today, we're gonna be talking specifically about the 1099k, which is going to report income from payment settlement entities, also known as PS ease, that include debit, credit, and prepaid credit cards, as well as third-party network transactions, such as your Venmo pay pals and cells. Now, prior to 2022, when you received payments that would fit those qualifications, meaning your credit cards or debit cards, your third-party payment networks like PayPal, Venmo, and Zelle, etc, you would receive a 10 99k Only if you grossed over $20,000 in income and exceeded 200 transactions. Alright, so let that sink in for just a second there.
If you'd grossed over $20,000 in payment through these apps, and exceeded 200 transactions, you'd be sent a 1099k. And so the IRS now fast forward to our standings today, that threshold has been cut down from $20,000, to $600. And from 200 transactions to what they call any number of transactions, which I don't even know what the hell that means. I think it means more than one. So just a month ago, you could have effectively had $19,000 in sales across 190 transactions and not be issued a 1099, you basically would have had to have been an online retailer to hit those numbers. But today, you could sell one camera lens and be issued a 1099.
So why the rule change. Now there's a big difference between personal exchanges and professional exchanges, which is ultimately at the core of this issue, you know, what constitutes a personal exchange, and what constitutes a professional one. And originally, the rules were that 1099 ks would only be issued to business accounts, wielding professional exchanges. And if you go to most PSEs, they all have professional business options for that reason, if you go to paypal, you can sign up for a business account. Same thing with Venmo. Same thing with cash app. Now ultimately, what happened is kind of obvious. Many people started circumventing tax reporting, by using the friends and family or peer-to-peer exchanges on these apps, even if the transaction were actually business-related. And I'm sure you've heard of this term called under the table income. Well, that's basically what people have been leveraging with these apps justified or not. I know a lot of people who have collected wedding photography, income, portrait income, engagement, photography, income, basically anything b2c, for the most part, and so it doesn't take much sleuthing to realize why this rule is being implemented. Now, the IRS wants its cut, and listen, as much as I hate it. I also get it under the table income has another name that you're familiar with. It's called tax evasion. And you can justify it all you want, but that's really the letter of the law. So this rule is simply to account for the unreported income by side hustlers and additionally, it's another way of trying to reduce the tax gap, which is simply the difference between what is owed in taxes and what is actually collected, which right now is ridiculously huge. So it kind of brings up this question of, will this even make a dent in the tax gap at all? And for me, I'm gonna say it's highly, highly unlikely, you know, first of all, our yearly average, and I'm going to read this off per the US Department of Treasury, it states that our tax gap totals around $600 billion annually, and will mean approximately $7 trillion of lost tax revenue over the next decade. Okay, so that that's an astronomical mountain to climb number one. And then the second aspect is that I think it's just chasing to smaller fish. You know, the people the IRS are chasing here, the money they are chasing, it's coming from side hustlers. It's coming from low to mid come earners, people that are just trying to get by. And so it's no surprise why people are so up in arms about this. But before I get into my overall take, let's segue into our next question of who is impacted most.
who is most impacted by the 1099k? So first, let me quickly address who I don't think it impacts. Okay. So from my vantage point, it doesn't impact the working professional who keeps accurate books and records of all of his or her transactions. So if you're honestly reporting every payment for your business, this doesn't really impact you at all. So if you make $1,000, in print sales, or $2,000, in consultation fees, or $3,000, in licensing income, whatever it might be, you would naturally report these things. Anyways, nothing really changes, except you're going to receive more paperwork, telling you what you already know. So this part of the tax law has not changed. You report all your income, that is your business. So the biggest group of people that I think that it impacts them by impact, I should specifically say that I think it negatively impacts are the side hustlers, who have no intent to build a business from these transactions. And this is where it gets a little bit dicey. Okay, so this is where it gets people riled up, because it kind of feels like the little guys getting picked on here. And I can't really argue that, you know, maybe you were asked to pet sit your neighbor's dog and water their plants when they're gone for a month. And you certainly had no intention of being or becoming a professional dog walker. But if they paid you $600, through PayPal, by this year standards, you're gonna have to report that income as if you were a professional dog walker. Or another situation is maybe you hold a garage sale. And because Venmo is easier and safer than cash, you accept those types of transactions. And once again, anything in excess of over $600, you're going to have to report as if it were part of your professional income.
And so all the way back in episode 24, I broke down how the IRS determined if you are a hobby or a business, you know, there are actual steps, I'll be at somewhat vague to determine whether your passion is a legitimate business or not. And so even if you have already proven that the chocolate chip cookies that you bake and sell at the annual harvest festival in your hometown is just something that you do for the community, you still have yet another burden of proof or another IRS hurdle to go through. On top of that there's this growing conversation of double taxation. So to give you an example, if I were to sell my macro lens for $650, and I collect payment through Zelle, I will be taxed on that income this year after already having purchased that product with after tax dollars. And when you consider that most sales of used equipment already come at a loss inherently. And on top of that the money you would receive is getting hammered by inflation, you're looking at a triple to quadruple tax under the guise of a singular tax. So understandably, this has many people concerned and quite honestly a little pissed off.
So what should I do next? Alright, so from where I'm standing, this law should not impact your overall business, unless you're conducting under the table transactions on the read, which I've already mentioned, is not so legal, the IRS law states that you have to report all income for your business. So if you were maneuvering payments around three or four different platforms to make it seem like your transactions were less frequent and smaller than they were, you know, you're trying to disguise these as personal payments and not professional ones. And for many of you, you probably thought you were getting away with using Zelle the last couple years, because they do not meet the criteria of a payment settlement entity. So as such, they won't report your income to the IRS and issue a 1099k. So I understand you're not stupid, you knew this and you thought to yourself, great. We got a tax loophole here. Now again, the problem with this is this qualifies as tax evasion. Okay, there are legal ways to lower your taxes. This, my friends, is not one of them. And listen, I get it. It's super tempting, especially on small gigs. I'm not judging people. I'm just telling you what the law is. But if you are recording and reporting all your business income as the law states, the only headache you're going to receive are more 1099s to sift through.
Now, I did touch on this earlier, but let me give it a little bit more shine just in case I breezed past it. These 1099s should not be issued for personal transactions, okay, so if you're splitting rent with your roommate, or you're getting paid for dinner, or phone bills, or anything like that, you shouldn't have anything to worry about. But with that being said, I really have no idea how these apps are going to determine what classifies as a red flag and whether or not you should be issued a 1099. So my suggestion would be for now to attach a receipt of purchase to your payments, okay? And additionally add an accurate description of what that payment is for. Alright, so for good measure, tell your college buddies. Don't afford me money labeled with funny and crude descriptions or anecdotes. All right. So make it clear cut so that you don't have to document every single transaction, you want an easy system so that in case you do get a 1099, for mowing your neighbor's lawn, you can kind of prove it's not your business. Now, the second thing I would advise is going cold, hard cash when selling your stuff, okay? So this can be equipment, it can be sofas or TVs or cars, whatever, to me, that's not part of your business income, meaning it's not the intent of your business. So I would keep that separate. If you can any other sales, like licensing revenue, online products or tutorial sales, those will qualify as business income. So just make sure that you understand what is what what qualifies as business, what doesn't.
And so my last honest impressions on this is that it's kind of I guess, the the first thing that comes to mind, is the word unnecessary. It just seems unnecessary, doesn't it? And listen, typically, I am the no excuses guy. So any law that comes into play any precedent that gets elected to the White House, I'm like, Alright, whatever. Let's figure out how to win. Regardless, let's play the game. But I do think this is going to hurt the small side hustles in the gig economy. So I'm not talking if you Uber 40 hours a week, obviously, that's not a small side gig, that's, that's part of your professional income. But there are a lot of people who have full time jobs. And it just isn't quite enough. So they have to supplement with some additional jobs here and there, like babysitting, or tutoring or photography for that matter. You know, there are a lot of people who work nine to five jobs and do some photography on the side, but have no intention of making photography, their primary business. And so why that is such a big deal is because they're being categorized and being taxed as photography business owners without receiving the benefits of being business owners, right. So they can't write off expenses for business mileage, or meals or equipment, but they can be taxed that way. I don't know. I mean, it just didn't seem doesn't seem right to me. Now. I'm not the tax expert here. But it just seems wrong. And I don't know, maybe I'm missing something there. But like I said, I think they're going after the small fish to close this absurd tax gap, which I you know, you guys tell me, what do you think about this, I don't see how this really makes an impact in the grand scheme of the country's economy. But it's definitely gonna make an impact on your household economy. Like, how much more can you tax the little guy? Right?
So, you know, let me know what your thoughts are. I'm interested in learning more about this. And I certainly have no problem being proven wrong. So you know, don't be shy hit us up on Facebook, or IG or wherever you consume this content. Anyways, my last words to you guys are just to be aware of this rule. For the time being, I'm not an expert on it. People are starting to learn about it right now. But what I think it's really going to hit is a year from now. All right, in 2023, when you're saddled up with a couple extra 1099 ks that you didn't anticipate or prepare for, that's when it might sting the most. So, as I mentioned, I'll link a couple articles in the show notes. I'm sure we'll get more insight into this as the year goes on, and certainly by 2023. Hopefully, we'll have enough freelancers out there to expound upon their experience on this process and how difficult it may or may not be. Alright, so that's my time, folks. Thanks for tuning in. We're rolling on with Artrepreneurs Season Two. See you guys next week.
What's up Artrepreneurs thank you for tuning in and making it all the way to the end of the episode. If you enjoy the content you just listened to hit subscribe and tune in again next week. Also follow us on Instagram and Facebook at Artrepreneurspod for updates, promos and giveaway contests that we run throughout the year. And if you haven't already, be sure to check out our really cool website Artrepreneurspod.com It's a great resource for you to download informational PDFs and booklets access discount code from our amazing affiliates and read what our audience is up to on our community blog. For now, I just want to say thank you for tuning in supporting the show and being a part of this journey. This is Michael der signing off for now Artrepreneurs Season Two let's go