Dear [CLIENT NAME]:
Many taxpayers operating in the “gig” economy (a fancy term used to describe a side job) use smart phone apps to accept payments from customers. If you are accepting payment through one of these apps in exchange for goods and services, then you will likely receive Form 1099-K, even if you haven’t received one in the past.
For payment cards (credit cards, debit cards, etc.), there is no threshold amount that must be met to receive Form 1099-K due to payments received through a payment card transaction. Therefore, if the taxpayer received even just $0.01 of payments from a payment card transaction, they should receive Form 1099-K for those payments.
For third-party settlement organizations that are not credit card companies, such as Venmo, PayPal, Apple Pay, Google Pay, etc., the filing threshold for Form 1099-K is $20,000 and 200 transactions.
The gig economy has exploded over the last two decades. It is estimated that over 60 million Americans participate in the gig economy. Most gig economy income streams revolve around driving services, such as Uber, Lyft, DoorDash, and Grubhub. In addition, many other taxpayers who have traditional jobs that used to accept only cash payments (such as hair stylists) are now using payment apps.
There is a lot of debate as to whether you may be treated as an employee or as an independent contractor when you are performing gig work. And, depending on where you live, it’s possible that you may be treated as an independent contractor for federal tax purposes and as an employee for state purposes.
Income you earn as a sole proprietor (including independent contractors) is subject to both income taxes and self-employment taxes. However, you may be able to deduct more of your expenses as an independent contractor than if you were an employee. You also have more planning opportunities to set up self-employed retirement accounts that allow you to invest more for your retirement than a traditional IRA and claim a greater tax deduction each year.
In addition to personal services, renting out homes, cars, and recreational vehicles through smart phone apps are also very popular sources of income in our gig economy. The rental income you derive is taxable to you, and the rules can become very complex if you are renting out property that you also use personally. There are additional tax twists if you are renting out your home.
In any scenario, you bear the ultimate recordkeeping responsibility and must be able to substantiate any deductions claimed on your income tax returns.
If you have, or are considering, a gig economy job, then contact our office for a consultation. We can discuss your specific jobs and the rules that apply to each one. Once we know which set of rules apply to you, we can help you plan ahead and take advantage of any tax planning opportunities available to you.
Sincerely,
Your tax professional
