5 New Key Freelancer Tax Changes
One thing in life is quite true: change is inevitable. And when it comes to taxes, change is continuous and important. The IRS has been busy, and freelancers are the recipients of some recent changes that should be understood and perhaps discussed with their CPA or tax advisori.
#1 – The Form 1099-MISC is being replaced.
The IRS Form 1099-MISC is familiar to freelancers who have been in business a while, as they receive one from most of their customers/clients and they are also required to present them to vendors that they pay in most cases. It reports earnings paid to the IRS with a copy to the recipient of the income, and this is how the IRS knows the income of independent contractors.
The Form 1099-MISC is being replaced with the Form 1099-NEC. As the 1099-MISC has been a multi-use document, the 1099-NEC has replaced it to specifically report earnings of independent contractors.
#2 – The IRS is All Over Cryptocurrency.
To give you an idea of how much focus the IRS is putting on cryptocurrency, the first question on the Form 1040 this year became: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” Due to the massive growth in the popularity of cryptocurrency and the lack of what the IRS would like in the way of controls and reporting, they are focusing on getting as much information as possible about transactions.
#3 – The Coronavirus Relief Bill and charitable contributions.
Did you make any charitable contributions by cash, check, or credit/debit card during the tax year? If so, up to $300, you may be eligible to reduce your taxable income by that amount. Hard goods contributions are not eligible, such as a vehicle donation. Of course, it is the IRS, so you will need proper documentation in the form of a receipt from the charitable organization.
#4 – Additional possible effect of Economic Impact Payments.
As with all tax rules, and especially with this one, you should probably discuss it with your CPA or tax advisor. Basically, depending upon your situation, you may receive an additional credit if your 2020 tax return has a smaller adjusted gross income amount than the one that was used to calculate the initial stimulus check. You may also be eligible for an additional credit if you have additional dependents.
#5 – Generally, freelancers are a focus.
As can be seen from the other items here, the IRS has taken the growth of the gig economy seriously, and there is a focus on making sure that all income is being reported accurately by a growing number of freelancers. It is a good time to meet with your CPA or tax professional to modify any record-keeping or other practices that impact tax reporting to avoid an audit notice.
None of these changes are individually a concern, but together they indicate the IRS focus on freelancing and a need to adapt if necessary.