Author Topic: 2021/22 Tax Question | Build Back Better Bill Change in Taxes  (Read 632 times)

HappyCamper5

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2021/22 Tax Question | Build Back Better Bill Change in Taxes
« on: December 11, 2021, 06:00:14 PM »
I am confused about the new tax laws in the build back better bill that just passed. I use cashapp and venmo to receive money from friends and roommates paying me back for food or gas. Small amounts but it adds up over time. This year, I have also started helping out a friend launch her website. She is FIRE'd and isn't selling anything or setting up a business for the website. She has sent me around 3k in small payments via cashapp/venmo as sort of a thank you and payment for the work I am doing. I wasn't planning on setting up a business or claiming this money as income since it's so little. However, I received a statement from venmo saying that since I received over $600 that they are reporting it and I need to fill out a 1099 with a tax ID number. I looked into the new laws and it seems like everyone in the US is going to start needing to claim even small things like selling items on craigslist, or getting paid back for paying a bill as income. Am I understanding that correctly? In my case, since technically I am receiving money for work, will I need to register as a business and claim this is business income? Or do I just claim it as extra income that is outside my regular day job paycheck on my tax forms? Any insight on how this may change the tax bracket I am in? I make 60k/yr at the day job. Any insight you have is appreciated!

seattlecyclone

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Re: 2021/22 Tax Question | Build Back Better Bill Change in Taxes
« Reply #1 on: December 11, 2021, 07:44:13 PM »
First of all, the Build Back Better package is not the law of the land yet. It passed the House, but it's not clear what changes will be required for it to pass the Senate or whether it will pass at all.

You are required to report all income on your tax return, always have been. In reality it turns out that people are more likely to report their income when they know the IRS already has gotten word about it from another entity through a 1099 form etc. This website work sounds a lot like self-employment to me. You're performing a service and receiving money in return. While your state may or may not technically require you to register this as a business with them depending on the amounts involved, this registration is not a precondition for claiming self-employment income on your tax return. You can claim business income as a sole proprietor regardless of what formalities you have or have not done to "set up" your business.

How will this change your tax bracket? Well, it's $3,000 of income. If you're near the border between tax brackets maybe part of this $3,000 will be taxed at the next higher bracket. In addition, there's self-employment tax of roughly 15%. That can certainly sting sometimes. On the plus side, you'll get a bit more credit on your earnings record toward social security benefits someday.

As to the other stuff you mention, selling stuff on Craigslist (or eBay, or a garage sale) only counts as income to the extent that you received more for the item than you originally paid. If you're selling the occasional thing for a loss just to get it out of your house, that's not income. Similarly, having a friend reimburse you for half of a restaurant meal, or having a roommate pay you back for their share of the utilities, that's not income. If people start getting 1099s for this sort of money transfer there will probably be a lot of people blindly entering it into TurboTax and paying tax on these amounts, but it's really not required.

secondcor521

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Re: 2021/22 Tax Question | Build Back Better Bill Change in Taxes
« Reply #2 on: December 11, 2021, 07:58:41 PM »
[seattlecyclone typed faster, but I'm going to go ahead and post my answer also.  We probably wrote similar stuff.]

First, the Build Back Better Act has only passed the House.  It is currently awaiting action in the Senate.  It may or may not become law.  Personally I think it is reasonable to expect that none of the provisions in the BBB Act will affect people's 2021 taxes.

Regardless of whether or in what form the BBB Act passes, the following is currently true:

You are required to report all taxable income, regardless of how much or how little it happens to be, and regardless of whether or not you have a business structure.

It's unclear the nature of the $3K.  You might consider it a gift, if it was unexpected and you and your friend had no formal work arrangement.  The other options are hobby income and self-employment income, both of which are taxable ordinary income.

It sounds like Venmo is going to send you a 1099-K, which is a form used to track income payments, usually for people like Uber drivers and the like.  If they do, and they probably will if they say they're going to, it'll have your SSN on it and a dollar amount.  They will also send a copy of the 1099-K to the IRS, so the IRS will expect to see it included on your tax return.

I don't know what provisions are in the current BBB Act regarding smaller dollar transactions.  There was apparently a change in another law, the ARP Act, which lowered the reporting threshold to $600, which sounds like what you're referring to.  But that is law that takes effect in 2022, not 2021.

You are correct in that there will be a lot more 1099-K's issued, and a lot of people wondering how to deal with it on their taxes.

You do not need to set up a business structure for this income (although you could if you thought it was a good idea).

There are 9 factors to determine whether it is hobby income or self-employment income.  They are listed here:  https://www.irs.gov/newsroom/tips-for-taxpayers-who-make-money-from-a-hobby

If it's hobby income, you'll report it on Schedule 1 line 8 Other income.

If it's self-employment income, you'll report it on a Schedule C and Schedule SE for the self-employment taxes you'll need to pay on the income.  You'll be able to deduct any applicable business expenses from your income on Schedule C and will only pay SE taxes and income taxes on your net profit.

If it's hobby income or self-employment income, it'll just be additional ordinary income which will be in addition to your $60K day job.  What you might not understand is that with tax brackets, it's only the amount that is in the higher brackets that is taxed at that rate.  It's *not* as though if your income gets into the 22% bracket that *all* of your income is taxed at 22%.  It's just the amount over whatever the bracket threshold is that will get taxed at the 22% bracket; the rest of your income below that level will be taxed at the 0% (standard deduction), 10%, and 12% brackets.  This visualizer might help:

https://engaging-data.com/tax-brackets/?fs=0&reg=63000&cg=0

 

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