How the New Tax Rule Could Affect Your Side Hustle Income 💸📉

📝 Intro

If you’re making extra cash through platforms like Etsy, PayPal, or Venmo, brace yourself—new IRS rules are rolling out that could impact your side hustle income. Starting in 2024, the reporting threshold for Form 1099-K is changing, meaning more of your transactions might be reported to the IRS.

But don’t panic just yet. While the new rules are tightening up, there’s still time to prepare. Let’s break down what this means for you and how to stay ahead of the game.

📚 Table of Contents

1. Introduction
2. Understanding the New Tax Rule
3. Who Is Affected?
4. What You Need to Do
5. State-Specific Rules
6. Potential Legislative Changes Ahead
7. Closing Summary
8. FAQ

🔍 Understanding the New Tax Rule

The IRS is making significant changes to how side hustle income is reported. Here’s what you need to know:

• 2024: Reporting required for gross payments over $5,000.
• 2025: Reporting required for gross payments over $2,500.
• 2026 and beyond: Reporting required for gross payments over $600.

This phased approach aims to gradually lower the reporting threshold, giving small business owners, freelancers, and platforms time to adjust. The idea is to ensure that side hustle income is reported more accurately and consistently.

For example, if you earn more than $600 through platforms like PayPal, Venmo, Etsy, or eBay, the platform will issue a Form 1099-K to you and the IRS. If you don’t hit that threshold, you won’t receive a form, but you’re still required to report the income yourself.

Why the change? The IRS hopes to increase transparency and ensure that gig economy workers and small business owners are paying the taxes they owe on their side hustle income. (IRS)

👥 Who Is Affected?

These changes primarily impact:

• Freelancers and Gig Workers: If you’re earning money through platforms like Upwork, Fiverr, or DoorDash.
• Online Sellers: If you’re selling goods on eBay, Etsy, or Facebook Marketplace.
• Service Providers: If you’re offering services and receiving payments through platforms like PayPal or Venmo.

Even if you don’t receive a Form 1099-K, you’re still required to report all income on your tax return. The form is just a tool for the IRS to track payments; it doesn’t determine your tax liability.

These changes could also affect small business owners who may not have been aware of reporting requirements for side hustle income under the previous rules.

✅ What You Need to Do

With these new rules coming into play, here’s what you can do to stay ahead:

1. Keep Detailed Records: Start tracking all your side hustle income and expenses, even if your earnings are under the new threshold. If you’re unsure, it’s always better to be safe than sorry.
2. Separate Personal and Business Finances: Consider opening a separate account for your side hustle transactions to make tracking easier. Platforms like PayPal and Venmo offer business accounts for this purpose.
3. Understand Deductible Expenses: Familiarize yourself with what expenses you can deduct to lower your taxable income. Things like office supplies, travel expenses, and software tools might qualify.
4. Consult a Tax Professional: If you’re unsure about the impact of these changes on your tax filing, it’s a good idea to speak with a tax advisor who can provide personalized guidance.

🗺️ State-Specific Rules

In addition to the federal rules, some states have their own reporting requirements, which can be stricter than the IRS’s new thresholds. For example:

• Vermont, Massachusetts, Virginia, Maryland: Reporting required for gross payments over $600.
• Illinois: Reporting required for gross payments over $1,000 with at least four transactions.

Each state may have different criteria for reporting side hustle income, so it’s important to check your state’s tax rules to avoid any surprises.

⚠️ Potential Legislative Changes Ahead

Recently, the U.S. House of Representatives passed a bill that would restore the previous reporting threshold of $20,000 and 200 transactions. If this bill becomes law, it would effectively repeal the new $600 reporting threshold, giving small business owners and gig workers much-needed relief.

This bill is still under consideration in the Senate, so it’s unclear when or if it will become law. However, if passed, it could delay or reverse the implementation of the $600 threshold. 

🔚 Closing Summary

The new IRS reporting rules are designed to increase transparency and ensure that all income is properly reported. While these changes may seem daunting, with proper planning and organization, you can navigate them smoothly.

Remember, the key is to stay informed and proactive. By understanding the new thresholds and keeping accurate records, you’ll be well-equipped to handle these changes and keep your side hustle income in check.

❓ FAQ

Q: Do I need to report income if I don’t receive a Form 1099-K?

A: Yes, you’re required to report all income, regardless of whether you receive a Form 1099-K.

Q: Will these changes affect my tax rate?

A: These changes don’t affect your tax rate, but they do impact how much income is reported to the IRS.

Q: How can I keep track of my income and expenses?

A: Consider using accounting software or apps designed for freelancers and small business owners to track your finances.

Authority Resources

GOP megabill looks set to end the $600 tax-reporting rule

The IRS Now Knows a Lot More About What You Sell

Internal Resources

How to Get the IRS to Pay You: Max Out Your Refund Now

Save Big: 7 Reasons Tax Receipts Matter

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