Gig Workers Impacted by Latest Stimulus Bill

The stimulus bills which Americans have received in response to the COVID-19 pandemic have been a real boon to those who managed to receive them. However, the sheer amount of information within these bills have made it difficult for the average person to understand each aspect within them. This ranges for anything from small business loans to tax breaks for specific individuals. Gig workers are no different! The latest stimulus bill, the American Rescue Act, is changing how gig workers approach their taxes.

What is a Gig Worker?

A gig worker is anyone who is earning income outside of the traditional model of employment. That is, someone who doesn’t have a 9 to 5 wage or salaried position. Gig workers are seen by the Internal Revenue Service( IRS) as independent contractors. This means that they do not receive many of the benefits which a traditional employee would have. Employer benefits like health insurance and retirement plans are not offered to gig workers.

On the other hand, a gig worker receives a lot more flexibility in how he or she approaches the work day. They can work shorter or longer hours, and are primarily responsible for the amount of income which they earn through their labor. Gig workers can come from all walks of life and take on very specific jobs.

What does this have to do with the stimulus bill?

Some gig workers are given a Form 1099-K from their employers at the end of each tax year. This is where things get a little bit tricky. For that reason, it will always be a safe move to consult with a tax professional before making any major moves with your taxes. YokeTax professionals keep up to date on all IRS changes in order to save you the most money.

How Form 1099-K USED to work

Usually, regular employees are provided with a Form W-2 from their employer. It informs them of how much money they earned with that employer during the tax year. It also notes how much money was withheld for taxation purposes, retirement, healthcare, and other aspects of stable employment.

The equivalent of the W-2 for gig workers is the Form 1099-K. While this form does not show any deductions, it is used by gig workers to report income to the IRS. Anyone who was paid through a third-party payment network, such as Paypal or Stripe, can expect their payments to be sent back to the IRS if they receive a 1099-K. However, there are two primary thresholds which keep most gig workers from being sent a 1099-K.

1. He or she must earn annual gross payments which exceed $20,00
2. The worker must provide over 200 transactions

This means that, even if the gig worker cleared the first requirement, they would not have received a Form 1099-K if the second requirement was not met. This made it so only certain types of gig workers would be realistically taxed correctly. An Etsy shop owner may be able to pass these requirements, but what about gig workers who have more sporadic demand for their labor?

Why the new bill affects gig workers

In response to these concerns, the IRS has significantly lowered the bar. Beginning with the 2022 tax year, gig workers who earn an excess of $600 a year will receive a Form 1099-K. The amount of transactions which the gig worker executed no longer matters. Gig workers who do not report their earnings will be on the hook.

The IRS has always required gig workers to report their income, just as it expects all people in American territories to do so. However, it is of little surprise that many people try to hide their earnings in order to avoid paying the taxman. Even more had no intention to omit the information. They simply were not sure what was required of them due to misinformation. However, the IRS’s message is clear to all gig workers: No more tax dodging!

As Benjamin Franklin said, “...Nothing can be certain, except death and taxes.”

Want to save yourself the hassle? The IRS will tax your earnings, but a smart tax pro can lower how much it takes from you.

What about earnings through Venmo?

If you are sending or receiving cash gifts through a Person-to-Person app such as Venmo, you might worry that the money will be seen by the IRS as income. Does the new tax bill affect this? No. These are seen as wire transfers between individuals, not payments for a good or service. As such, the IRS does not tax these gifts. If you are using these P2P platforms for your business, however, then the money is considered taxable income.

Depending on the amount which is transferred, the IRS might become suspicious. For example, regular payments above $1,000 to the same recipient may come off as more of a business transaction. In fact, Venmo does report any large currency transfers to the Office of the Comptroller of the Currency. If the amount sent reaches $10,000 (or a series of payments is near that limit), then Venmo will flag the account as a potential bad actor. To illustrate:

- Getting $100 from grandma for your birthday: No issues. Not taxed.

- Borrowing $1000 every now and then from a friend: Suspicious, but plausible. Not taxed.

- Receiving $1,000 from someone for providing a good or service: Taxed

- Receiving $9,000 from anyone: Highly suspicious. Venmo will notify the OCC. Taxed

A similar situation can be seen through CashApp, and app much like Venmo. Individual accounts of Paypal follow the same rules, but Paypal business accounts will be taxed. If you are still confused or if you have a specific situation, ask a tax pro for advice.

What this means for the federal government

Obviously, this change means that all gig workers will be expected to report any and all income which they earn from their work. The relaxing of the rules down to a simple $600 threshold makes things easier for everyone. Gig workers can report their earnings with greater confidence, and the IRS has an easier time tracking economic activity in the gig economy. Local and state governments also benefit, as they now have access to IRS data which can result in more tax compliance from their residents.

The Internal Revenue Service expects the simplified ruling to bring more money into the government over the next 10 years. In fact, the Treasury Inspector General for Tax Administration estimated that 63% of income is misreported when third party money handling companies do not provide accurate information on customer spending. Because about 80% of gig workers earn less than $20,000 a year, many used to not receive a Form 1099-K. An $8 billion boost in tax revenue is expected within the first tax year following this decision.

Gig workers in some states have different problems

This more relaxed take on reporting requirements for gig workers is not exclusive to the federal government or the new stimulus bill. In fact, many states have been going down this path for years. Twelve states and Washington D.C. have their own varied requirements for gig workers and the Form 1099-K.

Florida, Kansas, Oregon, and Tennessee. These states meet the federal threshold ($600 as of the 2022 tax year). The 1099-K only needs to be filed at the state level, rather than local.

Arkansas, D.C, Illinois, Massachusetts, Maryland, Mississippi, Missouri, New Jersey, Vermont, and Virginia. Each has their own thresholds and must be looked at on a case by case basis.

California is creating its own 1099-K form.

As for states without their own 1099-Ks, the IRS is willing to share tax data in order to increase tax compliance.

If you have any concerns about these changes to the tax code, are worried about potential back taxes which you may need to pay, or if you have any questions, ask a tax pro today. If you are in a hurry and need a tax professional as soon as possible, call or text “YOKE” to 210-980-0355.