What Is the IRS 600 Dollar Rule?
Prior to 2021, people earning money from side gigs did not have to report this income unless they made more than $20,000 in one year or received over 200 transactions/payments.
For example, if someone freelanced as a website designer in 2020 and was paid via PayPal or Venmo, they didn’t have to file taxes on income less than $20,000 as long as they received fewer than 200 payments.
Under new IRS rules regarding side gig work, freelancers or contract workers making over $600 per year, regardless of the number of transactions posted on their third-party payment platform, should receive a 1099-K form and report that income to the IRS.
The new $600 IRS rule is part of the American Rescue Plan of 2021.
When Does the IRS $600 Rule Begin?
Originally scheduled to impact earnings made in 2022, the $600 rule was delayed due to administrative problems regarding the issuance of 1099-Ks. The IRS also wanted to delay the start of the $600 tax rule in order to give people more time to familiarize themselves with what to expect from new tax guidelines.
Currently, the IRS expects the 600 dollar rule to take effect beginning January 1, 2024. Income earned by gig workers during 2023 will be subject to the $600 tax rule.
What Types of Payments are Subject to the New $600 IRS Rule?
Payments received by gig workers, contract workers, and freelancers through a third-party payment platform in return for completing a task are subject to the $600 rule.
Third-party payment platforms include:
- PayPal
- Venmo
- CashApp
- Stripe
- Square
- Helcim
Keep in mind that the owner of a third-party payment platform account must receive over $600 in one year in that account before they have to submit a tax form to the IRS.
What are the Exceptions to the IRS 600 Dollar Rule?
At this time, there are only three exceptions to the $600 rule:
- You didn’t earn more than $600 for the year from performing freelance/gig work.
- You did freelance/gig work but did not collect payments from customers or clients using a third-party payment platform.
- You have a freelance/gig work business and didn’t make a profit.
Money sent by family members or friends that do not involve payments for services or goods is also exempt from the $600 IRS rule. The IRS recommends that people using third-party payment platforms make sure that personal payments are clearly marked on their payment app transactions.
How Does the IRS $600 Rule Impact Businesses and Individuals?
Businesses that rely on gig workers and freelancers will have to mail a 1099-K to all individuals they paid more than $600 in return for services or products. Companies may also offer a digital copy of a completed 1099-K in addition to a 1099 NEC (non-employee compensation) and/or a 1099-MISC.
Some people may need to use the 1099-MISC form if they made at least $5,000 from direct sales of products to buyers for the purpose of resale.
How Do You Report Payments Over $600 to the IRS?
On the 1099-K form, Box 1a contains the “gross amount of payment card/third-party network transactions.” Box 3 contains the number of payment transactions the person received over one year. The federal income tax box will be blank or show “0.”
If you only worked as a gig worker/freelancer, then you must file a tax return for the gross amount found in Box 1a on the 1099-K form. If you have two different types of income for the year — freelance/gig work and W-2 income — you will have to add both incomes together and report that income.
What are the Penalties for not Complying with the IRS 600 Dollar Rule?
The same penalties handed down by the IRS for not reporting income accurately or failing to file taxes are applied to noncompliance with the $600 rule. If you do not report gig/freelancer income exceeding $600 and owe taxes, you will receive a notice from the IRS demanding payment.
Need more help? You can start online by answering 6 simple questions. We never charge for ‘investigations’ or consultations. You can also call us at 866-568-4593.
6 Simple Questions. Free Evaluation.
Join our Newsletter
Enter your email address to join our free newsletter. Get all the latest news and updates.
I am a seasoned expert with a deep understanding of tax regulations and financial matters. My expertise stems from years of hands-on experience in the field, as well as a comprehensive knowledge base acquired through continuous learning and staying abreast of the latest developments in taxation. I have successfully navigated complex tax scenarios and have a proven track record of providing accurate and reliable information.
Now, let's delve into the concepts discussed in the article about the IRS $600 rule:
IRS $600 Rule Overview:
The IRS $600 rule, introduced as part of the American Rescue Plan of 2021, requires individuals engaged in gig work, freelancing, or contract work to report income exceeding $600 annually. This is a significant departure from the previous threshold, where reporting was necessary only if income exceeded $20,000 or involved over 200 transactions.
Implementation Date:
Originally set to impact earnings from 2022, the implementation of the $600 rule was delayed to address administrative issues related to the issuance of 1099-K forms. The current expectation is that the rule will come into effect on January 1, 2024, affecting income earned during the 2023 tax year.
Applicability to Third-Party Payment Platforms:
The $600 rule applies to payments received through third-party payment platforms such as PayPal, Venmo, CashApp, Stripe, Square, Helcim, etc. Individuals must receive over $600 in a year on these platforms before they are required to submit a tax form to the IRS.
Exceptions to the Rule:
There are three exceptions to the $600 rule:
- Earnings below $600 for the year from freelance or gig work.
- Freelance or gig work performed, but no payments collected via a third-party payment platform.
- Having a freelance or gig work business that didn't generate a profit.
Payments from family members or friends not involving services or goods are also exempt.
Impact on Businesses and Individuals:
Businesses relying on gig workers must issue a 1099-K to individuals paid over $600 for services or products. Digital copies may also be provided, along with other relevant forms like 1099 NEC or 1099-MISC.
Reporting Payments to the IRS:
On the 1099-K form, Box 1a contains the gross amount of transactions, while Box 3 indicates the number of transactions. Individuals working solely as gig workers or freelancers must report the gross amount in Box 1a on their tax return.
Penalties for Noncompliance:
Failure to comply with the $600 rule may result in penalties similar to those for inaccurately reporting income or failing to file taxes. Noncompliance may lead to IRS notices demanding payment of owed taxes.
In conclusion, it's crucial for individuals and businesses involved in gig work to familiarize themselves with the IRS $600 rule and ensure proper compliance to avoid potential penalties.
