Note: This post provides information accurate as of the date of publication and is provided for educational purposes. For personalized advice, consult with your own tax advisor.
Tax Planning Tips
Tax planning is crucial for small business owners, individuals making money selling things online and anyone earning income from a side hustle. The profit from these activities is considered taxable income and there are steps that you can take now to ensure a smooth tax season. Here are a few tips to get you started:
- Start tracking your income and expenses – Utilize software programs or spreadsheets to help you stay organized.
- Make quarterly tax payments – Quarterly payments, also known as estimated tax payments, are payments made by individuals or businesses to the Internal Revenue Service (IRS) on a quarterly basis to cover their tax liabilities. These payments are typically required when taxpayers do not have taxes withheld from their income through regular paycheck withholdings. Every state has different requirements so check your individual state to determine if you need to make payments to your state.
- Track your mileage – Use an app or a good old-fashioned notebook to track your miles for work. Not sure if this applies to you? The IRS provides guidelines on who can deduct mileage or vehicle expenses for work here.
- Open a retirement plan – Consider options like a SEP IRA or Individual 401(k) to reduce your tax burden and save for the future! Need help? Reach out to one of our MFAA advisors to help you put a plan in place.
Lastly, if you’re self-employed or have income from a side hustle, you may receive various forms such as 1099-NEC, 1099-MISC, and 1099-K. The remainder of this blog will focus on Form 1099-K and the upcoming changes implemented by the IRS.
Decoding Form 1099-K
The reporting threshold for third-party settlement organizations, which include payment apps (e.g., Zelle, Venmo, CashApp) and online marketplaces (e.g., eBay, Etsy, Facebook Marketplace), was changed to $600 by the American Rescue Plan Act of 2021. This act mandated that all third-party settlement organizations report payments of more than $600 for the sale of goods and services on a Form 1099-K starting in 2022. These forms would be submitted to the Internal Revenue Service (IRS) and provided to taxpayers to assist them in completing their tax returns. Prior to the American Rescue Plan, the reporting requirement applied only to the sale of goods and services involving more than 200 transactions per year, totaling over $20,000.
The implementation of this requirement has been delayed but the IRS has taken steps in 2023 and 2024 to begin phasing in this threshold (currently $5,000 for 2024).
Now that you are thoroughly asleep, let’s dive into how this might apply to you.
What’s Taxable?
Any profit from the activities described above would be considered taxable income. For instance, if you bought a Tickle Me Elmo at the start of 1996 for $30 and sold it for $1,500 in December, the difference would be considered taxable income. However, if you sold it for $25, there would be no taxable income.
What’s NOT Taxable?
According to the IRS, “You shouldn’t receive a Form 1099-K for personal payments, including money received as a gift and for repayment of shared expenses.” This money wouldn’t be considered taxable, but that doesn’t mean you won’t accidentally receive a 1099-K! Good recordkeeping will prevent any frustration during tax season. Ensure you mark those payments as personal on third-party systems whenever possible.
Help! I Received a 1099-K and I Shouldn’t Have
Unfortunately, neither the IRS nor your tax preparer can correct your incorrect 1099-K. You’ll need to contact the issuer to rectify the error. They will need to issue you a 1099-K with a zero amount.
I Received a 1099-K But It’s Wrong
Your best course of action is to have the issuer send you a correct form. This is also not something the IRS or your tax preparer can do for you. To quote our favorite agency, “Don’t contact the IRS. We can’t correct your Form 1099-K.”
Keep in mind that tax laws and regulations may change over time. For personalized advice tailored to your specific circumstances, it’s always wise to consult with a qualified tax advisor. Many of the MFAA advisors are tax planning experts, you can find them here..