Question on taxes (2022 or 2023?)

[shairston13]

Hello all,

I have been trying to figure out what tax year my income from this week (week of December 19 - December 25) will be counted toward.

I know that the payment I just authorized on Friday, that will go into my account Monday, December 26, is income for the tax year 2022.

But then, after that, I have:

• A bonus issued today that I believe will technically be available for withdrawal in 5 days (December 28).
• My income for this week, which will be available to withdraw on Friday, December 30.

I am not sure either of those withdrawals will go into my account before January 1, as withdrawals made on Friday do not usually show up until the following Monday, though the bonus might. But I will technically be able to withdraw them from Upwork in 2022.

In researching this, I found out about the IRS "constructive receipt" doctrine which seems like it could go either way with this. I technically can receive the funds by clicking "withdraw funds" in 2022, but I can't technically receive or use them until they show up in my bank account, which probably will not be until 2023.

(And according to the "constructive receipt" doctrine, if I wait a day or two to click "withdraw," or forget to click withdraw, that doesn't matter, because when they are taxed is based on when they are actually available for me to withdraw, not when I actually do it.)

Any help on this will be greatly appreciated! Thanks so much!

Stephanie

[lysis10]

I base it on the day I transfer to my bank account.

[feed_my_eyes]

That might be okay in the U.S., but in some countries, you're supposed to base it on the date that the client paid you or the date that the work was completed. Otherwise, people could just hold their funds in Upwork or PayPal and transfer them the following year, in order to reduce the tax burden for the current year (which might work out in your favour if you expect your earnings to decline, but could be against the rules). 

Don't Americans get tax forms from Upwork that state whatever dates your clients paid?

[lysis10]

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Christine A wrote:

That might be okay in the U.S., but in some countries, you're supposed to base it on the date that the client paid you or the date that the work was completed. Otherwise, people could just hold their funds in Upwork or PayPal and transfer them the following year, in order to reduce the tax burden for the current year (which might work out in your favour if you expect your earnings to decline, but could be against the rules). 

Don't Americans get tax forms from Upwork that state whatever dates your clients paid?

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Pretty sure people do that anyway, but she's in the US which is why I commented. If she wasn't, I wouldn't have commented. I use whatever is shown on the transaction sheet for 2022. She's working with $100 and seems to be confused that taxes are tiered and believes the myth that getting a bonus and going up a bracket negates additional money, which is a myth that you see float around in wagie circles.

And no, we don't get anything unless we have enough transactions for the 1099. You can download invoices, but I never do. I only have the transaction sheet.

[feed_my_eyes]

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Jennifer M wrote:

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Pretty sure people do that anyway, but she's in the US which is why I commented. If she wasn't, I wouldn't have commented.

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I get that, but not all of the posts here mentioned that they specifically apply to the U.S. I noticed that at least one poster from Pakistan got confused, or I wouldn't have commented either.

[lysis10]

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Christine A wrote:

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Jennifer M wrote:

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Pretty sure people do that anyway, but she's in the US which is why I commented. If she wasn't, I wouldn't have commented.

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I get that, but not all of the posts here mentioned that they specifically apply to the U.S. I noticed that at least one poster from Pakistan got confused, or I wouldn't have commented either.

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Well, I use the transaction sheet and it matches perfectly with the 1099 I get, so that's why I recommend it.

[wlyonsatl]

If you are like most small businesses, you keep your books and pay income taxes on a cash basis. This means, in your case, until the money is in your bank or other account you can use to pay bills, withdraw cash from a bank or cash machines, etc. then it is not taxable for that tax period. Keep in mind that you should have been paying estimated taxes quarterly during 2022 if you are a US tax payer.

Having funds available in your Upwork account just means Upwork owes it to you. Until it is good funds available for your use in your bank account it's not yet constructive receipt. If it isn't in your bank account by Friday night (meaning you'll see it in your bank balance Saturday), it's not taxable income for 2022.

I wouldn't sweat it too much. Ask a tax professional if you want to be certain.

[shairston13]

Thank you both! Thankfully I do work with a tax professional but I won't be able to be in touch with him until after the new year. I was asking because my client gave me a larger bonus than expected and that bonus + the money I've earned already for 2022 puts me just about $100 away from jumping into another tax bracket (which, if I did, would fully negate that bonus). I was going to work a full day today and half a day tomorrow but I've decided to err on the side of caution and not resume work until next week so that I'm good regardless of what my accountant tells me!

Thanks again!

ETA: And I do work on a cash basis, and have always just assumed that I'm taxed based on what goes into my account in a given year, but I don't want to take any chances!

[25005175]

Well, you will know for certain once you receive your 1099-K from Upwork.

[shairston13]

I've never gotten one!

[25005175]

Well, a 2021 law mandated that we receive them for 2022, but the IRS just postponed implementation of that rule until the 2023 tax year. So it is a toss-up right now if Upwork will provide them.

[6bfcdaf8]

I think it's 2022. You can visit your upwork transaction history and see the "invoice" created on behalf of you. The invoice date will be 2022. The actual transfer of funds from your upwork account to your bank account should not matter at all.

[wlyonsatl]

The date of receipt of funds in your bank account is all that matters in calculating "income" if you or your company work on a cash (not accrual) basis for tax purposes.

[ac007c16]

Does it really not matter?

[wlyonsatl]

It matters for peoplle who pay taxes to the US government. Other countries may have different rules.

But it is doubtful even the US government would care whether a taxpayer claimed a very small amount of yearend income in one year or the other. But a person might as well follow the rules.

[25005175]

Regarding the cash method of accounting and the corresponding "constructive receipt" doctrine, see Pub 538, revised January 2022. My interpretation of the official text says that those funds that are past the security hold period on Upwork - in other words, the funds available for withdrawal - are required to included as income the moment that they become available for withdrawal from Upwork.

Also, unless you filed Form 1128 and received approval from the IRS to change to a non-calendar fiscal year, you are subject to the calendar year which runs January 1 - December 31.

[wlyonsatl]

Jonathan,

The document you linked to says, "You must report the income in the year the property is received or made available to you without restriction."

You can't do anything with your Upwork income until it is transferred to your bank or other account, so it is defintely subject to substantial restrictions because you can't use it while it's in your Upwork account. But, to avoid problems, the safest thing to do is just use the amounts Upwork reports to you (and the IRS) at some point in January 2023.

Many taxpayers delay income or accelerate expenses at the end of each tax year to avoid paying taxes in the current year. Some of those strategies are legal, some are not. 

[25005175]

The document you linked to says, "You must report the income in the year the property is received or made available to you without restriction."

You can't do anything with your Upwork income until it is transferred to your bank or other account, so it is defintely subject to substantial restrictions because you can't use it while it's in your Upwork account.

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Will, the full text in question, from publication 538:

Constructive receipt. Income is constructively received when an amount is credited to your account or made available to you without restriction. You do not need to have possession of it. If you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives it. Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations.

Example. You are a calendar year taxpayer. Your bank credited, and made available, interest to your bank account in December 2021. You did not withdraw it or enter it into your books until 2022. You must include the amount in gross income for 2021, the year you constructively received the interest income.

You cannot hold checks or postpone taking possession of similar property from one tax year to another to postpone paying tax on the income. You must report the income in the year the property is received or made available to you without restriction.

One explicitly does not need to have their money in their bank account. Having the funds available to withdraw from any institution counts as "constructive receipt". Hence, once the funds are available for withdrawal from Upwork, whether to a bank account, Paypal, Payoneer, what-have-you, they are constructively received, no matter how long the withdrawal transition may take. Substantial restriction is when the funds are in the "pending" (security hold) stage.

Many taxpayers delay income or accelerate expenses at the end of each tax year to avoid paying taxes in the current year. Some of those strategies are legal, some are not. 

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None of those strategies are legal under the cash method of accounting. This subsection and the next subsection of that same publication state so.

[wlyonsatl]

I see. That is pretty clear.

[patchworksvideo]

I also consider the fact that the moment the money is available in Upwork, it becomes available for "Instant Pay."  It's now available for me to do anything I want with it, though I may incur an expense in order to do so.