Charday Penn | E+ | Getty Images
If you’ve accepted payments via apps such as Venmo or PayPal in 2022, you may receive Form 1099-K, which reports income from third-party networks, in early 2023. But there’s still time to reduce your tax liability, according to financial experts.
“There’s no change to the taxability of income,” the IRS noted in a release Tuesday about preparing for the upcoming tax season. “All income, including from part-time work, side jobs or the sale of goods is still taxable,” the agency added.
Before 2022, you may have received a 1099-K if you had more than 200 transactions worth an aggregate above $20,000. But the American Rescue Plan Act of 2021 slashed the threshold to just $600, and even a single transaction can trigger the form.
More from Personal Finance:
IRS warns about new $600 threshold for third-party payment reporting
Tax ‘refunds may be smaller in 2023,’ warns IRS. Here’s why
3 lesser-known ways to trim tax bills, boost refunds before year-end
While the change targets business transactions, not personal transfers, experts say it’s possible some taxpayers will receive 1099-Ks by mistake. If this happens, the IRS says to contact the issuer or make adjustments to your tax return.
Either way, the IRS urges “early filers” to make sure they have all tax forms, including 1099-Ks, before submitting their return.
Whether you work with a professional or self-prepare taxes, you need to be ready, said Albert Campo, a certified public accountant and president of AJC Accounting Services in Manalapan, New Jersey.
Here’s what to know about reporting 1099-K payments on your return and how to reduce your tax liability.
How to report 1099-K payments and claim deductions
You can report 1099-K payments as income on Schedule C of your tax return, which covers profits and losses for sole proprietor businesses.
You’ll have the chance to subtract expenses, known as business deductions, on Part II of Schedule C, including things like the costs of your products, the portion of your internet and phone bills used for business, travel, possibly your home office and other expenses.
Jim Guarino, a certified financial planner, CPA and managing director at Baker Newman Noyes in Woburn, Massachusetts, said it’s good to begin reviewing possible business deductions now — including gathering your receipts for each one — to get organized before tax season kicks off.
If you’re paying for your own health insurance, there’s also a chance to deduct the cost of your premiums on Schedule 1, which reduces your adjusted gross income, Guarino said. This won’t apply if an employer provides your health coverage.
Consider a retirement account for your business
Another way to reduce your tax liability is by opening and contributing to a self-employed retirement plan, which is also reported as an “adjustment to income” on Schedule 1.
One option is a Solo 401(k), which covers one participant and their spouse, and allows employee deferrals, which are due by Dec. 31, and employer contributions, which are due by the tax deadline.
The key piece is making sure that the paperwork or documents are established by the end of the year.
managing director at Baker Newman Noyes
“The key piece is making sure that the paperwork or documents are established by the end of the year,” Guarino said. If you’re confused about setting up the plan or how to calculate the employer contribution, it may be smart to speak with a tax professional, he said.
Of course, if you haven’t maxed out your workplace 401(k), it’s possible there’s still time to boost contributions for your last one or two paychecks for 2022, but “time is of the essence,” Guarino said.
Plus, you have until the tax deadline for pretax individual retirement account contributions, which may also qualify for a deduction.
Keep personal and business transactions separate
When starting a business, tax professionals say to avoid “commingling” personal and business income and expenses by keeping them separate — and 1099-K earnings are no exception.
Campo suggests opening another bank account and credit card and using separate third-party payment network accounts for business transactions “to make your life a lot easier.”
Here’s why: If you receive a 1099-K for $10,000, and only $5,000 applies to your business, you’ll need to show the other $5,000 was for personal transfers through recordkeeping, he said.
“It creates more onus on the taxpayer,” Campo said, noting that it’s better to keep personal and business accounts separate because “it’s really cut and dried.”
It’s critical to save receipts for any business expenses you plan to deduct on Schedule C. In the case of an audit, the IRS won’t accept credit card statements as support, Campo warned. The agency wants to see copies of your receipts covering each business expense.