The American Rescue Plan, passed in March 2021, ushered in a few new changes to the tax law that you may have missed. The Child Tax Credit changed for 2021 which may affect many families as they file their income tax returns in 2022. But small businesses should be paying attention to the new gig economy income tax rule that also went into effect.
Small business owners or side hustle aficionados who use payment platforms like Venmo, PayPay, Zelle, or CashApp to accept money for business goods or services will have to pay more attention to how much money was earned for those goods and services.
Time to Organize Your Payments
Obviously, you should be reporting everything you earned as income to the IRS. But prior to this change in the tax law, it was up to you to make sure you were accounting for that money and reporting it on your tax return. Now, with this new rule, the payment platforms will have to report your earnings through their platforms to the IRS directly.
Beginning in 2022, if you earn more than $600 in the year through a payment platform for goods and services to customers, regardless of how many customers it takes to reach that amount, your payment service is required to report it to the IRS. You will receive a 1099-K after January 31st to show what the service reported to the IRS.
The reality? There are millions of small businesses, freelancers, solopreneurs, and independent contractors in the US working today. Many of them receive several small payments from many customers throughout the year, which will make keeping track of the total income difficult. This new tax rule for the gig economy has the potential to hurt many small businesses if bookkeeping, organization, record-keeping, or simple overwhelm is an issue.
Your Payment Platforms to the Rescue
How do your payment services know which payments are for goods and services for your business? You can expect a lot more questions from your payment service in the course of this year to help differentiate your transactions. Many of them already have separate forms to specify what the payment is for built into the transaction.
Expect to see pop-ups and emails from your payment platforms: “You may notice that in the coming months we will ask you for your tax information, like a social security number or tax ID, if you haven’t provided it to us already, in order to continue using your account to accept payments for the sale of goods and services transactions and to ensure there aren’t any issues when these changes take effect in 2022,” says PayPal.
Altogether, you can expect to see a lot more changes to your payment services through 2022 as these providers adjust to accommodate the new tax law. It’s best to adjust how you’re keeping track of your income from these platforms now, ahead of the changes, in order to keep your tax tracking on par for the coming year.