New IRS Rule that Impacts the Wealthy

A new tax law for 2022 requires online marketplaces and cash apps to send tax documents to many of their customers. It could affect millions of customers, but primarily targets the wealthy. This law changes tax reporting procedures for Americans who:

• Haven’t been reporting additional income
• Use online services to send money to friends
• Plan on starting a new side hustle in 2022

Overview

Previously, e-commerce and digital payment platforms that transfer money from a buyer of goods or services to a seller only needed to report customers who had more than 200 sales worth a total of more than $20,000 to the Internal Revenue Service (IRS). Beginning in 2022, Americans should receive 1099-K forms for every source of income they have that exceeds $600 for the tax year. The rising gig economy means that the IRS wants taxes on these income sources, especially during this period of inflation. Collecting more taxes allows the government to counter inflation and raise interest rates.

Impact

This law won’t affect anyone who has already been reporting all of their income. It’s especially important to report all your income now, whether or not it’s from a side hustle. The greatest impact will be to gig workers who haven’t been reporting income or those who plan to start doing gig work in 2022. People who sell products on sites like eBay, Mercari and Poshmark will be under particular scrutiny in 2022, since these companies haven’t been required to report customer income until now.

People who only send money through money-transfer services like Cash App, PayPal, Venmo and Zelle don’t have as much to worry about since these funds don’t represent income. Even if they use these services to send someone money each month, they still shouldn’t be affected.

Actions

The real targets of the new law are people earning income from online gigs. The first step they should take in preparing for this law is to obtain the services of a Certified Public Accountant (CPA), if they don’t already have one. The next step is to begin keeping detailed records of transactions, which should already be standard practice for anyone with their own business. Specific items to track include the following:

• Business expenses
• Invoices
• Receipts
• Sales

The idea behind this practice is to ensure you can defend yourself in the event of an IRS audit.

Summary

The 2022 tax year will require Americans to report income greater than $600 from all sources, which is much lower than the previous threshold. Those already doing this won’t be affected by the new law, but those who haven’t will need to start reporting income as indicated by the 1099-Ks they receive. It’s also important for gig workers with side hustles to begin documenting these transactions in case they’re audited.