Paid Electronically for Your Side Gig? Report It On A 1099-K
These days, with the click of a mouse, you can be your own boss. In fact, freelancers make up 35% of the total U.S. workforce, according to the “Freelancing in America: 2016″, a study conducted by Freelancers Union and Upwork.
The gig economy offers technology that drastically lowers the barrier to becoming self employed. Just a few examples are ride-sharing apps Uber and Lyft, home-renting platforms like Airbnb and VRBO, or even professional service sites like Fiverr, Upwork, or TaskRabbit.
With these tools, you don’t have to worry about the complications of setting up a business and getting paid. The technology and electronic payment systems (think PayPal payments) handle it all for you.
But the technology doesn’t remove the many administrative and tax complexities of being a part-time small business owner. Most gig economy workers will file new tax forms reporting their business income and deductions. That can mean potentially unfamiliar record keeping requirements, as well as technical rules for what they can and can’t deduct.
Because it’s so easy to take on side hustles, sometimes workers in the gig economy are completely unaware that they’ve entered a world of complicated tax reporting, filing, and compliance requirements.
How the IRS Tracks Your Electronic Payments: Form 1099-K
Since 2008, the IRS has been able to track and match the income sources of many small business owners, including gig economy workers, with Form 1099-K.
Form 1099-K reports to the IRS the income you receive from credit and debit cards, and other third-party electronic payment processors like PayPal payments. Then, the IRS can match that information against your return to check the return for accuracy.
The IRS can also use the form to infer whether you’ve left cash income off your return, based on your industry and the breakdown of your income sources.
For example, if your return shows 90% of your small-business income coming from electronic sales reported on Form 1099-K, but your industry typically shows 50% of sales from electronic sources and 50% from cash, the IRS may suspect you’ve left cash income off your return.
In that case, the IRS can trigger a notice or an audit to ask you to explain the discrepancy.
But keep in mind that just because you get a notice, it doesn’t mean the IRS is correct. It’s a good idea to consult with a tax professional who can research the issue and help you properly respond to the IRS.
Bottom Line: Keep Good Records and Report All Payments
If you earn self-employment income, report it on your tax return, whether you’re paid by cash, check, card, or through a payment processor.
And if you’re a new small business owner in the gig economy, getting help from a tax professional is usually a good idea. You wouldn’t be alone. Around 85% of all business taxpayers use a tax professional each year to properly file and avoid IRS scrutiny. Professionals can help self-employed taxpayers navigate the complex tax world of small business and stay in good standing with the IRS.
Find a tax professional near you now.