Whether you sell vinyl records on eBay, teach tennis lessons and get paid via Venmo, or rent your home on Airbnb, your side hustle can end up as a tax hassle.
The Internal Revenue Service delayed for a year a new law requiring payment processors like Venmo and Cash App and platforms such as eBay, Etsy and Airbnb to send tax forms to users who make more than $600 in revenue.
Even before the rule kicks in for next year’s tax season, however, you have to pay what you owe on that extra money, whether you are sent a 1099-K form or not. Payment processors such as Venmo and gig platforms such as eBay send users 1099-Ks, which account for an individual user’s total payments.
Millions of Americans have side hustles in some form, and that number is growing. Transactions for everything from dog-walking to piano lessons now generate digital records on payment platforms such as Venmo and PayPal.
Last year H&R Block reported a 26% increase in customers filing Schedule C, the form that sole proprietors use to report their business income on their tax return.
"For many gig workers, they’re surprised that they own a small business in the eyes of the IRS," said Caroline Bruckner, a tax professor and managing director of the Kogod Tax Policy Center at American University.
Being a sole proprietor means new tax responsibilities, including keeping good records throughout the year.
The old law, which still applies to money earned through 2022, said platforms had to send 1099-Ks only if a user received more than $20,000 in revenue and had more than 200 transactions. You are still on the hook to pay taxes on revenue below that limit in most cases.
"Keep in mind it’s only the reporting rules that have changed. You always owe taxes on your taxable income," said Ms. Bruckner.
Molly Hernandez, a Connecticut resident, said she sold her five children’s used clothes on eBay, Mercari and Kidizen for years and never thought about it at tax time. Now that she also sells items for others, she is navigating taxes as both a casual seller and a very-small-business owner.
On her to-do list ahead of filing her 2022 taxes, due April 18: "deciphering" a Kidizen report of 657 transactions that she has to individually categorize as personal or business sales, so she can report them correctly on her tax return.
"Our taxes have always been pretty simple, but this year we’re talking to a CPA for the first time," Ms. Hernandez said, noting that her husband, who gets a straightforward Form W-2 Wage and Tax Statement from his employer, seconded the idea of hiring a certified public accountant. "I don’t want to make a mistake."
If you make sales for profit on eBay or get paid for tutoring math on Venmo, you will need to account for that income when you file your taxes. Here’s what to know about side income and when you may owe taxes.
Check your state’s income-reporting rules
Some states already require businesses like Venmo and Etsy to send 1099-K forms to customers who receive relatively small amounts of money. According to payment platform Stripe, the threshold is $600 in Maryland, Massachusetts, Mississippi, Vermont, Virginia, and the District of Columbia. And it is $1,000 in New Jersey, $1,000 and at least four transactions in Illinois, and $2,500 in Arkansas.
If you don’t receive a 1099
You are supposed to report any earned income, whether a company sends you a 1099 or not, Ms. Bruckner says. So, if you are a sitter on cat-sitting app Meowtel, or you offer private tennis lessons and your clients pay you, whether by cash, check, credit card or on an app, you should be reporting the income on Schedule C. The same is true if you sell goods on an e-commerce platform for profit.
Schedule C filers should track expenses throughout the year since those expenses are deductible against your self-employment income, Ms. Bruckner said.
Most rental income is taxable
For landlords and Airbnb hosts, any rent that a tenant pays counts as taxable income, and it goes on Schedule E, the form taxpayers use to report rental income. Keep records of expenses, including property repairs and maintenance, which are deductible.
One federal tax exception lets homeowners rent out their residence for two weeks or less a year, said Alan Pinck, an enrolled agent in San Ramon, Calif. He had a client who rented out a cabin in the Sierras to outdoor-apparel maker Eddie Bauer LLC for $50,000 for a 10-day photo shoot and didn’t have to pay taxes on that.
When you sell your stuff
Generally, you don’t have to report personal items sold at a loss on your tax return, said Kathy Pickering, chief tax officer at H&R Block. Say you clean out your closet and sell clothing for less than you originally paid. There is no tax owed and nothing to report.
By contrast, if you sold the clothing for more than what you originally paid, that gain is taxable, and you should report it on your tax return on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D, Capital Gains and Losses, Ms. Pickering said.
If you get a 1099-K after selling clothes on services such as Poshmark, you have to include both sales at a loss and sales at a gain on your return. Sales at a loss go on Schedule 1. The IRS issued FAQs about Form 1099-K in late December with detailed examples of how to report sales of personal items.
You might get a 1099-K for a payment to a friend
If a friend sent you $800 on Venmo or PayPal to reimburse you for a concert ticket and you get a 1099-K reporting this as income, you can list it as "Form 1099-K, Received in Error" on Schedule 1, Line 8z and Line 24z, according to the IRS FAQs.
You may need to make estimated-tax payments
If you have any self-employment income, say you have a full-time job but drive for Uber on the side, for example, you need to think ahead to the 2023 tax year, Ms. Pickering said.
That means having to file estimated-tax payments if you aren’t already paying enough in taxes throughout the year through W-2 withholding from a day job and have earned $1,000 or more from the side hustle. Estimates for tax year 2023 are due April 18, June 15 and Sept. 15 of this year and Jan. 15, 2024.
"It’s a very hard lesson for new independent contractors and side hustlers to learn," Ms. Bruckner said.