The topic of gig workers has been a frequent point of conversation of late, especially with respect to the new tax laws surrounding their way of making a living. From Uber and Lyft drivers to Etsy and Ebay sellers, gig workers have become an important part of the national economy. The IRS recently made changes to tax regulations that impact gig workers’ income. And while states have their own regulations regarding gig workers — California being one that has much stricter rules — it’s important to understand the new IRS regulations.
The gig economy has become a major avenue by which people are earning income. Gig workers typically earn money from providing on-demand work, goods or services; and it’s often conducted through a website or app. Examples of gig workers are Uber and Lyft drivers. Or someone who sells vintage clothing on eBay, or does graphic design work. While gig work is often considered supplementary to full-time income, the money earned is taxable and must be reported to the IRS.
When the American Rescue Plan Act of 2021 was passed, it included a provision that primarily affected gig workers and independent contractors with a side hustle. Before the act, companies like Venmo, Paypal, Cash App, Square, Stripe, Stubhub, Etsy or Ebay were only required to send an IRS Form 1099-K for gross payments exceeding $20,000 and more than 200 transactions within a calendar year.
However, the new provision requires third-party payment processors to report payments received for goods and services of more than $600 a year. This is a huge difference! It means if someone sells goods or conducts a service and collects payments of more than $600 through one of those companies, they will receive a 1099-K and that income will be reported to the IRS.
When an individual works full-time for an employer, that employer is responsible for withholding income tax from the employee. For gig workers, they are responsible for paying their own income taxes. They can do this by making quarterly estimated tax payments throughout the year, which includes self-employment tax. Additionally, if a gig worker is self-employed, they must pay all their Social Security and Medicare taxes on their income from the gig activity.
It’s very important the gig worker is correctly classified by the employer or online company that is brokering the transaction (i.e., Ebay, Uber, Lyft, etc.). This is also true for independent contractors and those providing freelance services. The businesses they serve must either classify them as an employee or independent contractor. This determines who is responsible for taxes to the IRS. Generally, taxpayers can use the IRS’ worker classification page to see how they should be classified. However, some states — California being a big one — has much stricter classification standards. Be sure to check your state’s regulations and not just rely on the federal classification.
The new gig worker provision in the American Rescue Plan Act of 2021 was set to take effect January 1, 2023. However, the IRS pushed that implementation date back to January 1, 2024, which means the new reporting requirements will take effect for the 2023 tax year. That being the case, it does not mean gig workers should not be tracking and reporting their income from these sites. The IRS does require reporting of any income, whether a gig worker or independent contractor receives a Form 1099 from the company.
If you are a gig worker, or a company that pays independent contractors, it’s important to understand these new requirements and put practices into place now, at the start of the 2023 tax year. This is especially true if you are a gig worker or company in California. Don’t try to navigate the IRS and these new guidelines alone. Contact a tax professional or experienced tax attorney to help you through the process.
Allison Soares is a partner and tax attorney at Vanst Law. Before starting her own practice, Soares was a partner at a tax law firm where she honed her skills handling a wide variety of tax and employment-related cases. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.
