Same Tax, “New Rule”: What the 2022 Tax Rule Means for Workers With Side-Hustles

Photo by Tech Daily on Unsplash

Baylee Kalmbach, Associate Member, University of Cincinnati Law Review

I. Introduction  

PayPal transformed online business transactions in 1998 with its innovative platform for businesses and consumers to utilize touch-free and secure digital payments.[1] It continues to revolutionize digital transactions today with its current ownership of Venmo––the result of an $800 million acquisition of Braintree in 2015.[2] As Venmo and other electronic payment applications started off as a way to send money without physically exchanging cash, their convenience and social features have led to widespread utilization by businesses and self-employed workers over the last few years.[3] Near the end of 2021, the Internal Revenue Service (“IRS”) announced a new tax rule impacting these individuals, requiring third party payment applications to report on behalf of individuals receiving income for goods and services totaling more than $600.[4] Though the new rule only allows the IRS to cross reference what workers and businesses should already be reporting, the change can be intimidating and might inspire workers with side-hustles to adjust the way they operate.

II. Background

Different tax and reporting requirements apply to different business structures. For example, most self-employed individuals file an annual return, pay annual income tax, self-employment tax, and a quarterly estimated tax.[5] Workers who side-hustle for extra cash are only required to pay self-employment tax if they make more than $400 annually.[6] To report income received for goods and services through a third-party provider, businesses are typically provided with a Form 1099-K.[7] As part of this requirement, before 2022, third party providers were required to report all amounts received through card transactions, whereas the reporting threshold for third-party applications was more than $20,000 in total income and 200 transactions annually.[8]

Further, the rule for self-employed or gig workers has always required reporting earned income through any of the 1099 forms.[9] According to the IRS, “[w]hether it’s something they’ve been doing for years or something they just started to make extra money, taxpayers must report income earned from hobbies.”[10] Workers who are not self-employed often depend on the side job to provide a 1099-K or 1099-MISC if they earned more than $600 a year.[11] These forms are intended to ensure that individuals report the correct amount.[12] However, even if not provided with a 1099, the worker must report income to the IRS.[13]

III. Discussion

Because of the prior rules applicable to third party payment processors, sending 1099s to users with business accounts is not a new practice.[14] What is new to these online payment providers is the threshold for reporting. For calendar years after 2021, all transactions totaling more than $600 annually must be reported––regardless of the total transactions.[15] Though the threshold is substantially lower, the rule for taxpayers has always been the same.[16] The change only necessitates more filing expectations from online payment applications.[17] Simply put, it allows the IRS to cross-reference the provider’s reports with those supplied by individuals.[18]

Because this rule seeks to hold those making business transactions through online payment services accountable, Venmo users who send and receive money for personal transactions will not be impacted.[19] The IRS “is trying to track income received, not the transfer of funds between family and friends.”[20] For example, non-taxable peer-to-peer transactions include reimbursement from a friend for dinner, splitting rent with roommates, or money received as a gift.[21] In order to avoid mistaken tax fees or having a transaction flagged by the IRS, it is recommended to use qualifying words like “reimbursement” or “gift” when sending and receiving money among family and friends.

Even if you are not operating under an organized business, the IRS will want to know about the income you have earned through a side-hustle. For instance, if you refurbish furniture on the side and sell it for profit, you will need to report this as taxable income.[22] Alternatively, if you are using Venmo or PayPal to sell secondhand items off Facebook Marketplace for a loss, this is a non-taxable transaction.[23] Even if you enjoy flipping furniture and consider it a hobby, if you’re operating to make a profit instead of for recreation, the IRS will consider your activity a business and you will need to follow the reporting requirements as such.[24]

Because businesses and self-employed workers making $20,000 or more with more than 200 transactions per year are the only ones required to record digital transactions using a 1099-K, the lower threshold will require more workers with side-hustles to utilize this form, many likely seeing it for the first time. While the change can be unnerving, the process is fairly simple and is detailed on the IRS’s website for third party network transactions.[25] In summary, the only action required from individuals is to use the information on the 1099-K provided to them “in conjunction with [their] other tax records to determine [the] correct tax” they owe.[26] A 1099-K is only an information return,[27] whereas individuals must file and report their own tax returns. Provided they qualify for the rule, the 1099-K will already be sent to the IRS on their behalf.[28] As follows, workers will not have to separately report these transactions, assuming that the income is otherwise accounted for in their overall return.[29]  

Notably, the change should inspire workers with side-hustles to utilize different methods when receiving payment, especially if reporting income through information returns is new to them. However, this change should not include moving to cash payments as a method to sidestep the IRS, as reporting cash income is still required one way or another.[30] Instead, this change could be to utilize Venmo and PayPal’s business transaction options to keep personal and business transactions separate. Having a separate account for business matters will be critical when using information from your 1099-K. It makes double-checking and cross-referencing the report with your own records more tangible–which is precisely what the IRS will use your 1099-K for. Additionally, maintaining a separate business account from your personal transactions will help ensure that your peer-to-peer activity is not mistakenly flagged as taxable income.

IV. Conclusion

In short,“[t]his isn’t a new tax. It’s a new reporting requirement.”[31] The “new rule” only makes tax evasion more difficult. As income reporting has always been the rule, it would be unwise, and illegal, to convert to cash only or use hidden messages in transaction descriptions to evade detection by the government. Instead, side-hustlers who use third party payment applications for business transactions should be proactive in keeping business records and all other filing requirements in check for February 2023––when the 2022 tax rule will officially carry out.

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[1] Brian O’Connell, History of PayPal: Timeline and Facts, TheStreet (Jan. 2, 2020), https://www.thestreet.com/technology/history-of-paypal-15062744 [https://perma.cc/KM4B-EFW9]. 

[2] David Curry, Venmo Revenue and Usage Statistics, BusinessofApps (Jan. 11, 2022), https://www.businessofapps.com/data/venmo-statistics/ [https://perma.cc/LVT5-YJGS].

[3] Leeron Hoory, Rob Watts, PayPal Vs. Venmo: Which One Is Best For You?, Forbes Advisor (Sept. 21, 2021), https://www.forbes.com/advisor/business/paypal-vs-venmo/ [https://perma.cc/N9SU-P5Z4].

[4] Internal Revenue Service, Get ready for taxes: Here’s what’s new and what to consider when filing in 2022, IRS (Dec. 16, 2021), https://www.irs.gov/newsroom/get-ready-for-taxes-heres-whats-new-and-what-to-consider-when-filing-in-2022 [https://perma.cc/E2PH-2T87].

[5] Internal Revenue Service, Self-Employed Individuals Tax Center, IRS (Jan. 19, 2022), https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center [https://perma.cc/FCX2-C7R5].

[6] Id.

[7] Jordan Smith, New tax rule requires PayPal, Venmo, Cash App to report annual business payments exceeding $600, Fox29 Philadelphia (Jan. 5, 2022), https://www.fox29.com/news/new-tax-rule-requires-paypal-venmo-cash-app-to-report-annual-business-payments-exceeding-600 [https://perma.cc/4NBZ-VAYY].

[8] Joe Stone, IRS 1099 Tax Form Explained: Here’s Everything You Need to Know, GoBankingRates (Sept. 20, 2021), https://www.gobankingrates.com/taxes/filing/1099-form-should-file/ [https://perma.cc/ZP6E-RLNS].

[9] Tax Considerations for Gig Economy Workers with Multiple Jobs, TurboTax (Jan. 21, 2022), https://turbotax.intuit.com/tax-tips/self-employment-taxes/side-giggers-tax-tips-for-side-jobs/L6025l8Uh [https://perma.cc/9AP3-LAL4].

[10] Internal Revenue Service, Earning side income: Is it a hobby or a business?, IRS (Aug. 25, 2020), https://www.irs.gov/newsroom/earning-side-income-is-it-a-hobby-or-a-business [https://perma.cc/UL9E-CN8W].

[11] Zina Kumok, What I Learned When I Filed Taxes from My Side Gig, earnest (Nov. 22, 2021), https://www.earnest.com/blog/filing-taxes-from-my-side-gig/ [https://perma.cc/RQ2Z-HERK].

[12] Id.

[13] Id.

[14] Internal Revenue Service, Understanding Your Form 1099-K, IRS (Jan. 12, 2022), https://www.irs.gov/businesses/understanding-your-form-1099-k [https://perma.cc/4XDG-3VGX].

[15] Id.

[16] Id.

[17] New U.S. Tax Reporting Requirements: Your Questions Answered, PayPal Newsroom (Nov. 4, 2021), https://newsroom.paypal-corp.com/2021-11-04-New-US-Tax-Reporting-Requirements-Your-Questions-Answered [https://perma.cc/3NT5-HDDM].

[18] Id.

[19] Michelle Singletary, Venmo, PayPal and other payment apps have to tell the IRS about your side hustle if you make more than $600 a year., The Washington Post (Jan. 21, 2022), https://www.washingtonpost.com/business/2022/01/21/venmo-paypal-new-income-reporting-requirement/ [https://perma.cc/3RJT-LZHF].

[20] Id.

[21] Kemberley Washington, Venmo, Cash App And Other Payment Apps To Report Payments Of $600 Or More, Forbes Advisor (Nov. 15, 2021), https://www.forbes.com/advisor/taxes/cash-apps-to-report-payments-of-600-or-more/ [https://perma.cc/Z7YA-WRHU].

[22] See Singletary, supra note 19.

[23] Id.   

[24] Supra note 10.  

[25] Internal Revenue Service, General FAQs on Payment Card and Third Party Network Transactions, IRS (Jan. 14, 2022), https://www.irs.gov/payments/general-faqs-on-new-payment-card-reporting-requirements [https://perma.cc/TYA6-DKQQ].  

[26] Id.

[27] Internal Revenue Service, A Guide to Information Returns, IRS (Jul. 7, 2021), https://www.irs.gov/businesses/small-businesses-self-employed/a-guide-to-information-returns [https://perma.cc/XW29-8F6E].

[28] Id.

[29] Id.  

[30] Supra note 9.  

[31] See Singletary, supra note 19.