Act Now to Educate Gig Economy Clients on 1099-K Reporting Delay

Late last month, the IRS delayed the implementation of a lower reporting threshold for third-party settlement organizations. IRS Notice 2023-10 provides that the law will now be implemented for transactions occurring after calendar year 2022, and the existing 1099-K reporting threshold of $20,000 in payments or more than 200 transactions will stay in effect for tax year 2022, which ended Dec. 31.

Taxpayers reporting gig economy income for tax year 2023 and beyond will need to rely more on tax professionals, who can use this delay to educate their clients and ask them about any small businesses or side hustle income.

Tax Professionals Should Act Now

A mass email or newsletter is a great way to initiate the conversation and get some general information to clients. First, accountants should explain that clients need to report and pay tax on income from self-employment, including any side hustle. Clients must understand that taxes are a cost of doing business and must be factored in just like their internet service or electric bill. To ensure there aren’t any surprises at tax time, let them know what percent of the income they should be factoring in throughout the year.

For tax year 2023 filing, there will be some complications for tax professionals separating business from personal transactions, but that’s par for the course for small business reporting. Once clients understand what’s expected, they should ensure their business transactions are properly classified when they receive payment through a payment processor.

This will help a great deal when tracking reportable income. Make sure your clients tell their customers it’s OK to check the box saying it’s a business transaction—it will help everyone keep better records. If the transaction is personal in nature, such as a friend paying their share of dinner, they can check the family and friends box, which shouldn’t be reported as income.

There’s some good news, too: Even side hustles have tax-deductible expenses, and capturing expenses they incurred generating that income reduces the taxes due. Side hustles can deduct all the usual stuff: cost of goods sold, vehicle mileage, business use of home, and allocation of utilities such as cellphone or internet bills.

Problems Can Arise in 2024 and Beyond

When the new law takes effect, a significant increase in income due to the 1099-K likely will trigger a CP2000 or similar notice from the IRS’ Automated Underreporter Unit.

This shouldn’t cause too many people to have tax-related legal issues, as the new threshold doesn’t change the reporting requirements for self-employment income—it’s still $400. But realistically, the new reporting threshold will force more self-employed taxpayers into compliance whether through voluntary reporting or IRS audit. People could be looking at a 20% accuracy-related penalty and a failure-to-pay penalty.

Tax attorneys should be aware of possible crossover into a tax controversy issue in late 2024 and beyond, when the IRS will begin issuing automated underreporter notices for anyone who received a 1099-K but didn’t include the income in their tax returns. The delay in implementation provides more time for tax professionals to give their clients a better understanding of their reporting. Those who don’t use the extra year to their advantage are just delaying the inevitable.

Passed as part of the American Rescue Plan of 2021, the new rule will reduce the reporting requirement to $600 per year from $20,000 per year (or 200 transactions) regardless of the number of transactions.

The new reporting threshold has been subject of concern since personal transactions through platforms such as Venmo, Paypal, and Cash App will be reported to the IRS as part of the new, more stringent reporting requirements. Third-party settlement organizations report business transactions on Form 1099-K, which is provided to both the IRS and the taxpayer. The move is in line with the 1099-MISC reporting requirement and aims to increase tax reporting compliance among small businesses.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Adam Brewer is a tax attorney focused on resolving state, federal, and international taxation issues. His clients include individuals, businesses, and nonprofit organizations, and he assists them with resolving tax controversies with the IRS, Franchise Tax Board, Employment Development Department, California Department of Tax and Fee Administration, and Hawaii Department of Taxation.

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