The latest stimulus package, the American Rescue plan, has a surprising little provision that could create some major headaches for freelancers, bloggers, content creators and other self employed individuals come tax time.
Seven lines in the 630 page HR 1319 make a big difference in income reporting for many small businesses. Section 9674 of the American Rescue Plan dramatically changes how 1099's are issued for many individuals and small businesses.
How will this change things for bloggers, podcasters, content creators, and freelancers? I can see three ways this could create some real problems related to our taxes.
In this article, we'll talk about:
- What is Section 9674 and how does it change tax reporting?
- Three tax reporting trouble spots for self employed individuals and small businesses.
- Steps we can take to avoid those problems.
What is Section 9674 and how does it change tax reporting for bloggers, podcasters, content creators and freelancers?
Section 9674 in the American Rescue Plan changes the threshold for third party settlement companies (think Paypal and Stripe) and when they need to submit a 1099.
Payment processors currently won't file a 1099-K until you've received $20,000. These seven lines in the act will make that threshold $600.
A third party settlement organization shall not be required to report any information under subsection (a) with respect to third party network transactions of any participating payee if the amount which would otherwise be reported under subsection (a)(2) with respect to such transactions does not exceed $600From Section 9674 of the American Rescue Plan
If you are paid via Paypal, Stripe or any other third party processor, you might have never received a 1099 in the past. That's about to change.
A lot of us in the content world have multiple streams of revenue. It might be affiliate programs, advertising, sponsorships, commissions, product sales, the list goes on.
Those that pay us directly (cash, check, ACH) usually have to report that income to the IRS when it's more than $600. If they pay via Paypal, Stripe or some other payment processor, we won't receive a 1099 until we earn more than $20,000 through that processor.
We still have to report the income. However, we all know a lot of people don't. It's for that reason there's been pressure to change the threshold.
Even though it's a weird place to put the change, The American Rescue Plan makes the change.
Three ways the change in 1099-K reporting could impact bloggers, freelancers, and content creators
I'm sure there are a lot more than three.
Most of my content focuses on gig economy workers. In that world, we're on the receiving end of the 1099's. As my content business has grown, I find more opportunities now to be not only the contractor but also the contractee.
Section 9674 can create some real headaches on both sides of that contractor issue. Here are some ways bloggers, freelancers and content creators can be impacted.
1. Our income could be “double reported”
A lot of our customers don't understand when they should or should not send out 1099's. Many think that it's better to be safe than sorry. If in doubt, send it out.
I've actually heard of tax professionals and CPA's advising that. If yours tells you to do that, it's time to find someone new.
Just my opinion.
Here's the problem. You had an advertiser pay you $1,000 for your content or a blogger paid you $1,000 for some guest posts. They think they're doing the right thing by sending out a 1099-NEC at the end of the year.
But they paid you via Paypal. Now, thanks to this change, Paypal will send you a 1099-K.
So, you file your taxes and say you made $1,000. But the IRS comes knocking, asking why you're not reporting the $2,000 that they think you made.
This wasn't an issue when the reporting level was $20,000. If someone mistakenly sent you a 1099, it often didn't matter so much because Paypal wasn't going to send in that 1099K.
Now we just have to be more on top of things like this.
2. We could cause our contractors or virtual assistance to have income “double reported”.
If we pay contributors, we have to make sure we know when to send out a 1099.
And when not to.
Maybe we hire someone to work on our website. We get a consultant to help us set up our podcast. We hire our buddy to be a videographer.
When do you send them a 1099 and when don't you?
It's more important than ever to understand how the 1099's work. Otherwise, we might someone else in the same spot I just mentioned we could be in.
In a nutshell, it depends on how they're structured and how you pay them.
If you paid more than $600 to an individual, sole proprietor, partnership, or LLC that is taxed individually, you must send them a 1099 at the end of the year.
Unless they're going to get the 1099 from somewhere else. If you paid them through a gig platform, Paypal, Stripe, some other credit card, anything like that, you don't send a 1099.
Otherwise, they could be the ones getting the call from the IRS asking why they only reported half of their earnings. The IRS thinks they made more than they did because you didn't understand when not to submit a 1099.
3. A lot more content creators, freelancers and bloggers will be paying taxes on their income.
These changes in 1099-K reporting didn't change the tax law.
There was no change that says you have to pay more in taxes in any of this. Nothing is different in your tax obligation.
The only thing that really changes is Uncle Sam knows you made that money now.
You're supposed to report that income anyway.
That said, I know there's a lot of confusion about if you have to file your taxes if you didn't get a 1099. A lot of us have a lot of different streams of income. Some very small. Sometimes all are very small.
This is going to sneak up on some people. eBay sellers who never sold enough to get that 1099-K from Paypal may be in for a surprise.
And now that Uncle Sam knows you made that money, it's not a great idea to keep trying to fly under the radar.
What should bloggers, content creators, and freelancers do as a result of this change?
The important thing is, be proactive.
Understand, this does not go into effect until 2022 (for the 2021 tax year). That means you have time.
But the more you take steps now, the better you protect against this sneaking up on you.
1. Make sure the people paying you are handling the 1099's correctly.
Have you received 1099's from anyone who is paying you via credit card, Paypal, or third party provider?
This is a good time to follow up with them and make sure they're handling it correctly. Or maybe it's time to request that they change the payment method and avoid the confusion.
This might be a good time to provide an up to date W9. I've recently set up an LLC so I have a lot of that on my plate right now, making sure everyone is reporting to my EIN instead of my SSN.
2. Make sure you have the right information for those you are paying.
This is a new thing for a lot of us.
I don't know about you, but I started out pretty small. I'm STILL pretty small (or at least my business is).
But most of us can relate. We start the blog with the cheapest hosting you can get. We use our smart phone to record our videos. Or we crank out those freelance articles on the old laptop.
Then we start making money. A little here, a little there. We've been bootstrapping the heck out of our little venture but now, we figure out that a few dollars here and there help us earn more.
Next thing you know we're paying people to help us with this, that or the other thing. And now here we are, at a point where we have to provide a 1099 form? That's a pretty big deal when all along you've always been on the receiving end of those 1099's.
But that means it's time to up our game on the business side of things. It's time to start learning about how those 1099's work in the first place. Then we need to start collecting those W9's and paying attention to the details so we know whether we have to report those payments.
3. Start treating this like a business.
This is especially for anyone who's suddenly in the spot of figuring out what to do about those 1099's that you never were receiving before now.
There's something amazing about starting to make money with your creativity and your talents. But now that Uncle Sam knows you made the money, you need to know what to do about that.
You may be filing taxes as a business for the first time ever.
It's time to start learning how it works. And it's time to start tracking your income and your expenses.
The good news is our taxes are only based on our profits. You deduct any expenses that are part of your content creation, hosting, and operating your business from your business income. This is true even if you personally take the standard deduction.
What that means is, it's time to start tracking all that.
It's not really that difficult. If you think something is a legitimate expense for your business, keep track of it. Write it down. Put it in a spreadsheet. You can always ask an expert later.
Get a tracking program. I've found Hurdlr is a great beginning program. I think the free version of Hurdlr is more robust than Quickbooks Self Employed. Whatever is the easiest way to keep track of things, do it.
And start thinking like a business owner.
Cuz here's the thing: If you're going to be taxed like you run a business, that means you run a business.
The new stimulus is a great shot in the arm, just stay on top of this little tax change.
Like I said earlier, nothing is really changing in our tax obligation.
The main thing is that Section 9674 of the American Rescue Plan is a hidden little nugget that will change when income gets reported to the IRS. That change makes it more important to know how the whole 1099 thing works, both as one who receives 1099's and one who might be giving them out.
If you're aware of the changes and keep up on what to do with them, you can avoid a lot of the headaches.
Meanwhile, make the most of that $1400.