I get it. Inflation is making things so expensive. So you figure the IRS does not need to know the totality of your income from gig jobs.
5 reasons to report your fantasy football and gig income to the IRS
But good money management and financial integrity are about the long game.
You can benefit from disclosing gig and gambling income to the IRS. And it’s not just to avoid an audit or jail time.
Here are five reasons to report all your taxable income to the IRS.
The IRS has a new way to catch tax cheats
In case you are still unclear, all income should be reported on your tax return unless it is legally excluded. That’s the money you earn cutting hair or doing braids. It’s the cash you get for raking leaves or picking up people’s groceries.
And yes, all gambling winnings should be reported, too, says Eric Bronnenkant, head of tax at Betterment, a digital investment advisory firm.
One way the IRS finds out about your earnings is through third-party disclosures, such as a W-2 form from your employer or a 1099-K from a payment platform, such as PayPal, Venmo or Cash App. The agency uses an automated system to compare such information against what people report on their tax returns.
As part of the $1.9 trillion stimulus package in 2021, Congress significantly lowered the dollar threshold to trigger a 1099-K form. In previous years, payment platforms were required to issue them only if a person earned at least $20,000 and had at least 200 transactions.
But starting in 2022, the benchmark was reduced to $600, and there is no longer a requirement tied to the number of transactions. This means if you sell more than $600 in earrings on Etsy, you’ll receive a 1099-K in January.
Many people will be getting a 1099-K for the first time next year.
If there’s a discrepancy between your reported earnings and a 1099 received by the agency, you are likely to get a CP2000 notice of unreported income.
To be clear, as I noted in a recent column, cash gifts for weddings or birthdays are not taxable. So if you get a 1099 because of your wedding registry, it’s an error.
You might gamble that the IRS won’t catch everyone underreporting their income. But woe to the taxpayer who is caught. The money you saved skirting the law could easily be dwarfed by hefty IRS penalties and interest.
The IRS is required by law to charge interest on any past-due tax. The interest rate, set by law, is tied to interest rates on short-term Treasury securities and is due to rise to 7 percent per year, compounded daily, on Jan. 1.
“Depending upon interest-rate trends, that could be higher or lower in the future,” said IRS spokesman Eric Smith.
It can boost your Social Security benefits
You may be years away from collecting Social Security, but underreporting your income could cost you big time later in life.
Social Security uses your earnings and work history to determine your eligibility for retirement or disability benefits, or your family’s eligibility for survivor benefits when you die.
You must earn at least 40 Social Security credits to qualify for benefits. You earn credits when you work and pay Social Security taxes.
For 2022, you can accrue one Social Security or Medicare credit for every $1,510 in covered earnings, maxing out at four credits per year. You have to earn $6,040 to get the maximum number of credits, though the dollar amount goes up slightly as earnings averages increase.
Extra credits don’t increase your Social Security benefit.
However — and this is important — “the average of your earnings over your working years, not the total number of credits you earn, determines how much your monthly payment will be when you receive benefits,” according to the Social Security Administration.
When asked in an April Gallup poll, 55 percent of retirees said they rely on Social Security as a major source of income.
You may find a way around reporting all your income — getting paid in cash or having customers characterize a transaction as a personal payment on an app. Just know that not reporting it could translate into a lower benefit when you retire.
“Make sure that you are getting the most amount out of Social Security benefits that you can in retirement,” Bronnenkant said.
It can affect contributions to tax-advantaged retirement accounts
A self-employed individual can contribute as much as 20 percent of net business income, or up to $61,000, to a Simplified Employee Pension IRA for 2022, Bronnenkant noted. SEP IRA contribution limits increase to $66,000 in 2023.
“The more earned income you have, the more contributions you can make,” Bronnenkant said.
You could be missing out on tax breaks
Several tax benefits are available only to people who receive earned income, including the earned-income tax credit and the child-care credit (credit for child- and dependent-care expenses), Smith said.
Your income factors in your loan amount
Looking to purchase a home?
In addition to reviewing your credit history, lenders typically want to see at least a two-year history of tax returns to verify your income. If you’ve been underreporting it, that could affect the size of the loan and your ability to qualify for a favorable interest rate.
“Loan providers want to see copies of your tax returns, and if you’re understating income, you’re hurting yourself because you’re not really showing all of your income,” Bronnenkant said.
Here’s a year-end tax tip from Bronnenkant: Don’t structure your life to avoid reporting all your income.
Source: WP
