IRS Warns Taxpayers of Consequences for Failure to Meet Certain Tax Obligations

A Form 1040 individual income tax return is seen in a file photo. Photo by Tim Boyle/Getty Images

The IRS has issued a notice to “gig economy” service workers and those who receive a foreign source of income that they have to report potential tax obligations on income.

An IRS statement issued on March 1 states that taxpayers have to report income from the gig economy on their tax returns, “even if the income is from part-time, temporary, or side work; paid in any form, including cash, property, goods or digital assets; not reported on an information return form like a Form 1099-K, 1099-MISC, W-2, or other income statement.”

The gig economy is defined as activities that people earn income from providing on-demand goods, services, or work—and it’s often via an online platform such as an app or a website such as Instacart, Lyft, DoorDash, or Uber.

On Dec. 23, 2022, the IRS announced a one-year moratorium on implementing a controversial new reporting rule for online businesses for transactions exceeding $600. In the past, the threshold for 1099-K tax form reporting was 200 transactions with a total value of $20,000. Although still taxable, earnings that didn’t meet that standard may have gone unnoticed by the IRS.

The new tax-reporting rule goes into effect in tax year 2023, the IRS stated. That rule was implemented under the American Rescue Plan, which was ultimately signed into law in early 2021.

“If you’re one of the millions of gig economy workers, such as a freelancer or contractor, you may have received payments totaling $600 or more from any one of your side jobs during the tax year,” tax-filing service TurboTax stated in a recent article. “If so, the individual or company that paid you generally must supply you with Form 1099-NEC for nonemployee compensation. If you receive payments through online payment services such as PayPal, you might also receive a form 1099-K. Payers will also send these forms to the IRS to report your income.”

The IRS advises those workers to access the agency’s “Gig Economy Tax Center“ for more information.

Work for Tips

Individuals who work in restaurants, hotels, salons, and similar industries and who regularly receive tips also have to report those payments, according to the March 1 statement.

“Cash tips include those received directly from customers, electronically paid tips distributed to the employee by their employer and tips received from other employees under any tip-sharing arrangement,” the IRS stated. “All cash tips must be reported to the employer, who must include them on the employee’s Form W-2, Wage and Tax Statement.”

It noted that “noncash tips”—defined as items of value such as passes, tickets, or goods and commodities given to the employee—don’t have to be reported to the employer. However, they “must be reported on a tax return,” the notice reads.

Tips that the worker didn’t report to the employer have to be reported separately on Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to include as additional wages along with their tax return, according to the notice. Employees have to pay their share of the Social Security and Medicare tax owed on tips, it notes.

“Employees don’t have to report tip amounts of less than $20 per month per employer. For larger amounts, employees must report tips to the employer by the 10th of the month following the month the tips were received,” the IRS stated.

Foreign Source Income

The latest IRS notice also stipulated that taxpayers have to report their foreign source income “regardless of where they live.” Both American citizens and resident aliens or those who hold green cards “must report unearned income, such as interest, dividends, and pensions from sources outside the United States unless exempt by law or a tax treaty.” They also must report earnings from sources outside the United States.

“They’re also subject to the same income tax filing requirements that apply to U.S. citizens or resident aliens living in the United States,” the IRS stated.

And it noted that federal law requires Americans to report their worldwide income, such as earnings from foreign trusts and foreign bank accounts. Those taxpayers may need to add Schedule B (Form 1040), Interest, and Ordinary Dividends to their tax returns.