New IRS rules mean migh-net-worth clients may not be properly accounting for Social Security or workers comp when paying their domestic help—especially if they use certain payment methods.

Shadow income that has historically flown under the tax radar is the subject of growing scrutiny from tax authorities. New IRS rules require reporting income for some transactions of just $600 or more, down from a much higher previous threshold. The American Rescue Plan Act of 2021 modified 1099-K reporting requirements for third-party payment networks such as Venmo, PayPal and Zelle. People who perform services as independent contractors and get paid via payment apps will also now receive 1099-Ks if the total exceeds $600, with no transaction minimum.

“Our communications with clients center around two things. One, that they may receive Forms 1099-K that they did not receive in prior years for certain online activities where money was sent to them,” said Ken Eyler, CEO of Aquilance. “Two, we help guide clients in conversations around employing domestic help versus engaging with them as an independent contractor, which will limit 1099-Ks received by their domestic contractors that may create issues.”

People who are selling their old household items, such as furniture and designer clothes, do not need to report this income to the IRS if they are selling the items for less than they originally bought them for. Transfers excluded from income tax reporting include sales of personal items at a loss, reimbursements and gifts, although gifts may still need to be reported on a gift tax return.

“Paying workers under the table can create a liability for wealthy families,” said Mallon FitzPatrick, managing director at Robertson Stephens Wealth Management in New York. “Leaving it up to your employees to self-report can backfire in several ways. One of them is that employers are supposed to withhold taxes and failing to do so can result in penalties.

“Employees may end up under-reporting or not reporting their income for various reasons, including saving on taxes or because they aren’t working legally,” he added. “It’s important to set the expectations for new employees that their pay will be subject to taxes. It’s worth mentioning that there are likely benefits to them, such as unemployment and disability insurance, ... Medicare and Social Security. It may be a more-difficult transition for existing employees. Increasing their pay may help mitigate ‘take home’ income consequences.”

It is on the taxpayer recipient to determine and be able to document whether or not the income is taxable, Eyler added. Recordkeeping is key.

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