What Taxpayers Should Know About Big Changes to Form 1099-K Reporting – H&R Block (NYSE:HRB)

KANSAS CITY, Mo., Jan. 22, 2025 — Millions of Americans engaged in revenue-generating side hustles and casual selling may face significant changes this tax season due to the updated tax reporting requirements for Form 1099-K. Payment platforms, mobile apps, and online marketplaces are now mandated to issue a Form 1099-K to anyone receiving $5,000 or more in payments on a single platform during 2024.

This new requirement marks a dramatic shift from the previous reporting threshold of $20,000 and more than 200 transactions, indicating that roughly 20 million individuals will be affected by these changes over the next two years.

Implications for Side-Hustlers and Casual Sellers

What does this mean for taxpayers in the rapidly expanding side-hustle economy? Many individuals are turning to supplementary income sources to meet basic needs or fuel their aspirations. Some resell concert tickets or used designer items while others sell homemade crafts or work for rideshare companies. The changes in 1099-K filing requirements imply that casual online sellers, freelancers, gig workers, and small business owners may face a more complicated tax filing process as they navigate the new reporting threshold for the first time in 2024.

Recent reports indicate that Generation Z is the group most likely to rely on diverse income streams and online revenue-generating activities. Those impacted must now ensure they accurately account for and report their income, complying with IRS regulations.

Many gig workers might be surprised to learn they are classified as small businesses by the IRS. This classification comes with additional tax rules and a higher likelihood of IRS audits and inquiries, making tax filing more complex. Regardless of whether gig income constitutes a primary income source or a side hustle, individuals involved have more obligations, increasing their interaction with the IRS and state revenue offices.

“Although these changes could result in more paperwork at tax time, the bigger concern is about accuracy,” said a tax expert from H&R Block. “Tax professionals can help you navigate through this confusion to ensure you file accurately and optimize your deductions, allowing you to keep more of your hard-earned money.”

Despite the potentially overwhelming nature of these new tax requirements, individuals filing as self-employed or small business owners now have more avenues to mitigate their tax burden. They can benefit from various deductions related to expenses incurred during their business activities, thus lowering their taxable income.

Recommendations to Minimize Tax Liability

• Create separate business and personal profiles: Mixing personal and business transactions can complicate bookkeeping and make it difficult to distinguish income and expenses.
• Maintain detailed records: Keep comprehensive records of all business transactions, including amounts received, dates, and descriptions (sales receipts and invoices).
• Track expenses: Document all costs related to your business activities, including materials, shipping, advertising, and platform fees, to deduct them from income.
• Consider professional assistance: If feelings of being overwhelmed arise while managing tax requirements, seek out guidance from a tax professional for tailored advice.
• Utilize tax preparation software: For those who prefer a DIY approach, reliable tax software can assist in tracking income and expenses, generating necessary forms, and ensuring compliance.
• Plan for taxes: Set aside a portion of business income to cover tax obligations, preventing unexpected financial strains during tax season.

Those who receive a Form 1099-K for the first time this year should be aware of various deductions available against their reported business income. These may include home office expenses, business meals and travel costs, advertising expenditures, retirement contributions, and even tax preparation fees. If their business ventures grow, they might consider forming an LLC and filing taxes as an S Corp, which could lead to significant tax savings.

When evaluating business deductions, individuals should also note that declaring a loss in multiple consecutive years could jeopardize their self-employed status. Striking a balance between a hobby and a legitimate business is essential, with the intent to generate profit serving as a key indicator.

Embarking on self-employment introduces new complexities in tax obligations. Resources are available to help clarify the intricacies of 1099-Ks and related tax deductions. For comprehensive assistance, tax professionals stand ready to provide unique support tailored to individual situations.