The Internal Revenue Service issued new guidance for gig economy workers in November 2024, establishing a phased reduction in the Form 1099-K reporting threshold. The update clarifies tax obligations for self-employed individuals earning through rideshare apps, delivery services, and online marketplaces, aiming to improve compliance while giving workers and platforms time to adjust.
The IRS issued new rules in Notice 2024-85 that directly affect gig economy workers who earn money through rideshare apps, delivery services, and online marketplace platforms. The most significant change is a phased reduction in the reporting threshold for Form 1099-K, which tracks payments received through third-party payment processors.
The shift will occur over three tax years beginning in 2024. This year, companies must issue a 1099-K when payments exceed $5,000. In 2025, the threshold drops to $2,500. By 2026, it will fall further to $600. This marks a significant change from the long-standing $20,000 and $200 transaction rule that excluded many workers from receiving these forms.
The IRS guidance stresses that all self-employment income must be reported, even if a worker does not receive Form 1099-K. Self-employed individuals with net earnings from self-employment of $400 or more must file a tax return and complete Schedule SE to calculate self-employment tax.
This self-employment tax covers Social Security and Medicare taxes, which are normally split between employers and employees. Independent contractors, however, must pay self-employment tax in full on their net income. Workers are also responsible for their regular income tax, creating a combined tax liability that must be managed carefully.
Because gig economy workers are classified as independent contractors, platforms typically do not withhold taxes. This means workers must pay estimated taxes throughout the year. The IRS requires self-employed individuals to pay estimated taxes quarterly, with deadlines in April, June, September, and January. Missing these dates can result in an underpayment penalty at tax time.
The IRS also announced that during the 2024 tax year, it will not impose penalties on payment platforms that mishandle backup withholding. Beginning in 2025, however, penalties will be enforced for noncompliance.
Self-employed individuals may lower their taxable income by claiming business deductions. Deductible expenses may include vehicle costs related to business use, the home office deduction if space is used exclusively for work, health insurance premiums for self-employed individuals, and other ordinary and necessary costs tied to providing services. The self-employment tax deduction also allows workers to reduce part of their tax burden.
The IRS encourages maintaining accurate records through spreadsheets or accounting software to ensure deductible expenses are properly tracked. This is especially important for sole proprietors and limited liability company owners who must manage their taxes.
The gig economy has grown rapidly over the past decade, with millions of workers providing services through rideshare apps, delivery platforms, and online marketplace operators. The IRS considers all gig income taxable, regardless of whether a worker receives tax forms. Self-employed individuals must report income and pay their taxes even on part-time or side jobs.
For years, the reporting threshold for Form 1099-K stood at $20,000 in payments and 200 transactions. This left many gig economy workers without official documentation of their earnings, creating confusion when filing a tax return. Lawmakers and tax officials argued that the higher threshold made it too easy for income to go unreported, reducing compliance.
Most gig economy workers are treated as independent contractors rather than employees. Under independent contractor tax rules, individuals are responsible for paying taxes directly, including income and self-employment taxes. Unlike traditional employees, contractors do not have taxes withheld automatically, so they must manage tax obligations themselves through estimated payments and careful recordkeeping.
In announcing the new guidance, the IRS emphasized the importance of accurate records and timely filing. “Good recordkeeping is important to navigate tax rules successfully and avoid mistakes when doing gig work,” the agency noted in its online resources. The IRS guidance for gig economy workers highlights the need to report income even when a Form 1099-K is not issued.
The agency also reminded self-employed individuals that they must calculate self-employment tax to cover Social Security and Medicare taxes. This responsibility applies to all net earnings from self-employment, including nonemployee compensation and business income.
Tax professionals say the updated reporting threshold will bring more clarity and new responsibilities for gig economy workers. Experts note that independent contractor tax rules can be complex, particularly for those who must pay estimated taxes quarterly.
Advisors recommend using accounting software to track deductible expenses and ensure business deductions are applied correctly. By doing so, workers can reduce their taxable income while avoiding a surprise tax bill during tax season.
The updated rules mean that more earnings will be documented and reported to the IRS through Form 1099-K for gig economy workers. This makes it essential for self-employed individuals to prepare early for tax season by keeping accurate income and deductible expense records.
Workers should also be ready to pay self-employment tax on their net income, including Social Security and Medicare taxes. The IRS requires many independent contractors to pay estimated taxes quarterly to avoid an underpayment penalty.
Accounting software or consulting a tax professional can help calculate self-employment tax, apply the self-employment tax deduction, and manage business expenses. With proper planning, workers can reduce their tax liability and avoid a large tax bill at tax time.
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