Payments received via platforms like PayPal, Venmo, Etsy, or others can cause confusion for freelancers, gig workers, and side-hustlers in California. With the recent adjustment of the federal Form 1099-K reporting threshold, it’s particularly crucial to know what it reports and what income is reportable.

Note that the 1099-K Threshold Has Changed

The federal reporting threshold is now back to the $20,000 gross payment and 200 transactions per calendar year rule for third-party settlement organizations. Previously announced lower phase-in thresholds now do not apply generally, including at $600. California’s FTB states these rules are retroactive to tax years that started in 2022.

But there is one exception to this rule in California for app-based drivers. A 1099-K may still be issued to qualifying drivers if they receive payments of $600 or more and regardless of the number of transactions. Look for the best tax expert (like a payroll tax attorney in San Diego) who can help.

Most importantly, there is a difference between ‘reporting threshold’ and ‘taxability threshold’. Even if you don’t get a 1099-K, you may have to pay tax on gig income.

What Income is Subject to Tax?

In general, gig-related income on goods and services is taxable in California, regardless of whether a tax form is issued. It is for side businesses, part-time activities, cash payments, or full-time businesses.

In the case of graphic design work that is performed under contract, for instance, a freelancer may receive $8,000 from PayPal, but this income is typically still considered taxable income even if PayPal is not required to provide a 1099-K.

The main thing is to decide if it’s a business transaction or a personal one.

Expenses are Only Taxable If They Are Personal

Not all of the payments in your account are considered business income.

In most cases, a payment through a website doesn’t automatically make a personal reimbursement a business income. In general, a personal reimbursement, for example, if someone pays you to cover their half of the dinner bill and you pay it back, doesn’t automatically constitute a piece of business income.

It can become a problem when you have both personal and business payments in the same account. A 1099-K lists total amounts paid, and the gross amount could consist of payments that are not taxable income. Getting a professional (similar to a tax accountant attorney) is surely helpful in managing your pending taxes.

Maintain Separate Categories

• Rental fees earned from owning and operating a business website: Taxable as ordinary income.
• Online marketplace sales: May be subject to tax, depending on the transaction and the circumstances.
• Personal reimbursements: Not normally business income if they are actual reimbursements.
• Transfers to and from your own accounts: Not income, just because money moved.
• Refunds/returned payments: May need to be reconciled with the gross amounts.

Avoiding Double Reporting

A common error is double counting the 1099-K income. For instance, if a freelancer reports any money received from the platform as the 1099-K income, it could be double counted as gross business income.

In their place, however, reconcile platform statements with bookkeeping records prior to filing. The individual return, in general, calculates income based on federal adjusted gross income, so it’s important to report income correctly on the federal return.

A number of suggestions for freelancers in California

• If possible, have different payment accounts for personal and business transactions.
• Get annual transaction statements from all platforms.
• Determine personal reimbursements prior to preparing your own return.
• Maintain invoices, receipts, and expense records.
• If a 1099-K is not received, don’t assume that no taxable income was generated.
• Compare 1099-K totals with your actual business records.
• Carefully read Schedule C and California reporting requirements.

The 1099-K reporting threshold is not a rule governing whether income is taxable, but rather the reporting of transactions. In order to avoid double-counting and over-taxing business revenue, California freelancers should make sure to identify business revenue correctly, excluding any personal reimbursements, and reconcile their topping records.