If You Make $600 or More From Your Side Hustle in 2022, the IRS Will Know About It

Change is rarely easy, but this new way of doing things could benefit many.

While the move has been under discussion for years, a provision tucked away in the American Rescue Plan Act of 2021 lowers the threshold for reporting third-party payments to independent contractors, freelancers, gig workers, AirBnB hosts, and small business owners.

Who it will impact

If you receive $600 or more for providing goods or services in 2022, expect to get either a Form 1099-NEC or 1099-K early next year -- just in time to do taxes.

If you're an independent contractor paid by check, cash, money order, or direct deposit to your bank account, be on the lookout for IRS Form 1099-NEC (which replaces the old 1099-MISC). If you're paid through a third party, like PayPal, you'll receive a 1099-K.

The critical thing to remember? The IRS will receive a copy of the same 1099. The IRS will know if you earned $600 or more when you file your 2022 tax return.

A big change

Under current law, 1099 forms are only sent to you (and the IRS) when your total annual payments reach $20,000 across more than 200 transactions and you're being paid by a third-party processor.

Let's say you're a pianist who fills in on occasion for a local band and are paid by check. You earned a total of $7,500 in 2021. Because your earnings did not reach the $20,000 threshold, the band is not required to send a 1099-NEC to you or the IRS.

This time next year, though, the same would not be true. Since you earned more than $600, you and the IRS would be due a 1099-NEC.

Whether you bill clients directly or work through a hiring platform like Upwork, Uber, Rover, Lyft, (and others), the same rules apply. Once you hit the $600 threshold, the IRS wants to know about it.

Closing a loophole

As mentioned, talks have been underway for years about closing this particular tax loophole. The belief is that people are less likely to report income when they believe the IRS has no way of knowing.

According to legal resources site Nolo, you can expect third-party settlement organizations to request your Social Security number or Employer Identification Number this year. They will need one of these ID numbers to report your income. If they fail to get an ID number from you, they are legally required to withhold 24% of anything you earn over $600. Those funds will be sent to the IRS.

What if you use a third-party payer for more than work?

Let's say you regularly use PayPal to pay for goods and services, but you also receive payment for work you do through the platform. PayPal will only report the amount of money you earned; anything you spent or sent to friends or family is not included.

The upside

Because we don't know how many small business owners, crafters, freelancers, and gig workers fail to report their income each year, we're not sure how much more this change will put into government coffers.

What we do know is that there is an upside for those who report the entirety of their income:

• It levels the playing field. Let's say you have a small Etsy shop. You've always reported your income and paid taxes. However, some of your competitors don't report their income or pay taxes, and because their expenses are lower, they can undercut your prices.
• It makes life easier at tax time. Gathering 1099s helps you quickly calculate how much you earned last year. Those records may also remind you of allowable business expenses you forgot to deduct.
• There's less reason to worry about an audit. If you've made every effort to report earnings accurately, you don't have to panic if there's an error on your tax return that needs to be addressed. A letter from the IRS isn't an automatic crisis.

We humans don't tend to like change. Our brains see change as a threat and release fight or flight hormones when confronted with a new way of doing things. This change will be no different. Some people will be angry and upset because it's not how they're used to conducting business. Everything new becomes old as we adjust to our new reality, though. At some point, it will be difficult to remember a time when we didn't receive 1099s.