We hear a lot about how rich people supposedly don’t pay taxes. But the rest of us sometimes slip through the net as well, often using online payment platforms like PayPal, Venmo, CashApp and Zelle.
This is about to get a bit more difficult. The Internal Revenue Service is now requiring online platforms to report payments for goods and services that exceed $600 per year.
Of course, gig workers are already required to report – and pay taxes on – their income but it’s no secret that many, if not most, don’t. So you could say the government is just trying to make things easier for you, helping you report all of your earned income.
What’s a gig worker?
Don’t know if you’re a gig worker? The IRS has a website devoted to that very issue – and it offers a convenient batch of examples:
- Drive a car for booked rides or deliveries
- Rent out property or part of it
- Run errands or complete tasks
- Sell goods online
- Rent equipment
- Provide creative or professional services
- Provide other temporary, on-demand or freelance work
Types of gig income
Not wanting to let anything slip, the agency also lists types of income that must be reported:
- From part-time, temporary or side work
- Not reported on an information return form—like a Form 1099-K, 1099-MISC, W-2 or other income statement
- Paid in any form, including cash, property, goods, or virtual currency
Business or pleasure?
Like everything having to do with taxes, it quickly gets complicated. The IRS is trying to draw a distinction between money transfers between friends and family – which generally are not taxable – and sales of goods and services, which are
In other words, if you and a friend go to dinner and your friend picks up the tab, you can send your half to your friend tax-free. Likewise if you send your adult child a few bucks to tide them over.
But if you are billing someone for, say, writing a piece for their blog or mowing their lawn, that’s income and should be reported.
How is the IRS supposed to know which is which? Well, good question. Paypal already asks you to check a box indicating whether a transfer is personal or business. Zelle says it doesn’t have to.
Zelle, you may recall, is a bank-to-bank transfer service. Funds go from one bank account to another. Zelle doesn’t actually handle the funds and says it is therefore not covered by the reporting requirement.
Small businesses may object
There are signs that some small enterprises are trying hard to get around the new provision. Nail salons, barbers and dog groomers, among others, have begun posting “cash only” signs lately.
Our dog groomer said she’s trying to avoid the fees – sometimes 3% or more – charged by some of the services. A 30ish dog-walker we talked to said she had never filed a tax return and didn’t plan to start.
Both asked that we not use their names.
The upside of reporting income
It should be noted that there are some very solid reasons for gig workers and one-person merchants to report and pay taxes on their income.
Perhaps most important in the long run is that documenting your income affects how much you’ll receive from Social Security when the time comes. Benefits are based on your lifetime earnings and the pocket change you make walking dogs could make a big difference in your retirement or disability payments.
No one expects to get old, of course, but most of us do and it’s a good idea to plan for it. It’s also sadly true that anyone can become disabled at any time. All it takes is one wrong step off a curb or one fall off a step stool.
Social Security is the primary source of income for many disabled people and those benefits, just like retirement benefits, are based partly on previous earnings.
Orange jumpsuits clash with your hair
Then there’s the little matter of getting caught. While it’s true that the IRS is overworked and understaffed, it does still nab tax evaders every now and then – and when it does, it tends to make an example of them.
The dunking stool isn’t used anymore but a tax fraud conviction can, as they used to say, ruin your whole day. It’s really not worth taking the risk. After all, you may run for President someday and then every step you ever took will be scrutinized, criticized and bowdlerized.