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If you accepted payments through apps like 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 cut your taxes to pay, depending on finances. experts.
“There is no change in income taxation,” the IRS noted in a statement Tuesday about preparing for the upcoming tax season. “All income, including from part-time work, side jobs or the sale of property, is still taxable,” the agency added.
Prior to 2022, you may have received a 1099-K if you made more than 200 transactions with a total value greater than $20,000. But the American Rescue Plan Act of 2021 lowered the threshold to just $600, and even a single transaction can trigger the form.
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Although the change targets business transactions and not personal transfers, experts say it’s possible some taxpayers may receive 1099-Ks in error. 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’re working with a professional or preparing taxes yourself, you need to be prepared, 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 sole proprietorship profits and losses.
You will have the ability to subtract expenses, called business deductions, from Part II of Schedule C, including items such as the cost of your products, the portion of your internet and phone bills used for business, travel , possibly your home office and other expenses.
Jim Guarino, certified financial planner, CPA and general manager of Baker Newman Noyes in Woburn, Mass., said it’s good to start looking at possible business deductions now — including collecting your receipts for each — to get better. arrange before the start of tax season.
If you pay for your own health insurance, you also have the option of deducting the cost of your premiums on Schedule 1, which lowers your adjusted gross income, Guarino said. This will not apply if an employer provides your health coverage.
Consider a retirement account for your business
Another way to reduce your tax liability is to open and contribute to a self-employed pension plan, which is also reported as an “income adjustment” on Schedule 1.
One option is a Solo 401(k), which covers a participant and their spouse, and allows for employee deferrals, which are due by December 31, and employer contributions, which are due before the tax deadline. .
“The key thing is to make sure the paperwork or the documents are done by the end of the year,” Guarino said. If you’re unsure how to set up the scheme or how to calculate the employer contribution, it might be a good idea to speak to a tax professional, he said.
Of course, if you haven’t maxed out your 401(k) at work, there may still be time to increase contributions for your last one or two paychecks for 2022, but “the time is running out,” Guarino said.
In addition, you have until the tax deadline for pre-tax Individual Retirement Account contributions, which may also qualify for a deduction.
Separate personal and business transactions
When starting a business, tax professionals advise avoiding “mixing” personal and business income and expenses by separating them — and 1099-K income is no exception.
Campo suggests opening another bank account and another credit card and using separate third-party payment network accounts for business transactions “to make your life 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 that the remaining $5,000 was for personal transfers via record keeping, a- he declared.
“It creates more of a burden on the taxpayer,” Campo said, noting that it’s best to separate personal and business accounts because “it’s really cut and dried.”
It’s essential to keep receipts for all business expenses you plan to deduct on Schedule C. In the event of an audit, the IRS will not accept credit card statements as support, Campo warned. . The agency wants to see copies of your receipts covering each business expense.