This year, the IRS will finally begin implementing new 1099-K reporting requirements for people who earn income through third-party payment apps like PayPal, Venmo, Cash App, and Zelle.
This IRS reporting change, originally scheduled to go into effect in 2022, will ultimately result in payment apps reporting income over $600 to tax authorities. Previously, the third-party app would only send her 1099-K to users who received $20,000 in commercial payments in more than 200 transactions.
This story is part of 12 days of tipsto help you get the most out of your technology, home, and health during the holiday season.
The IRS delayed this new reporting rule for the second year in a row to give payment apps more time to prepare for the change. One problem: It’s not always easy to distinguish between taxable and tax-free transactions through third-party apps. For example, the money your roommate sends you for dinner via her Venmo isn’t taxed. This is the money you received for the graphic design work you did. The IRS has suspended implementation to avoid confusion and incorrect income reporting.
IRS Commissioner Danny Wuerffel said in a November 2023 statement: “We have spent months gathering feedback from third-party and other entities, but we are unable to effectively implement the new reporting requirements. It has become increasingly clear that additional time is needed.”
Starting this year, the IRS is planning a phased rollout that will require payment apps to report income of $5,000 or more for freelancers and business owners, instead of $600. The hope is that raising the threshold will reduce the risk of inaccuracy while giving agents and payment apps more time to work toward the final $600 minimum. is.
With the suspensions and changes, many freelancers are confused about what will happen this tax season and beyond. If you earn money through self-employment, here’s what you need to know.
What is the IRS $600 payment rule?
New reporting requirements first announced in the American Rescue Plan will require third-party payment apps to report revenue over $600 to the IRS. For 2024, only income over $5,000 will be reported.
If you’re self-employed, you should already be paying taxes on your gross income, even if you don’t receive 1099s from all your income. This is not a new rule.it’s a tax report change. The IRS plans to shift reporting requirements to payment apps, allowing it to monitor transactions that often go unreported.
How IRS 1099-K changes will affect your 2023 tax return
The IRS suspended this reporting requirement in 2023. Of course, if he earns his freelance income, he will need to report his 2023 tax year income when filing taxes this year. He will not receive a 1099-K form from a third-party app unless he receives a payment of more than $20,000 on 200 or more transactions in 2023.
Instead, you can receive a 1099-NEC from a company you work with. You must report all self-employment income, even if you haven’t received a tax form from your client.
What the IRS 1099-K rule means for next year’s tax return
Currently, if you earn more than $5,000 from a freelance client or side hustle through a third-party payment app in the 2024 tax year, you will receive a tax Form 1099-K and file your return in 2025. Affects taxes. This requirement is still subject to change, as the IRS may decide to postpone this rule again or change the threshold.
What payment apps are included in this IRS rule?
All third-party payment apps from which freelancers and business owners earn income will be required to begin reporting transactions involving individuals to the IRS in 2024. Popular payment apps include PayPal, Venmo, Zelle, and Cash App. Other platforms that freelancers may use, such as Fivver and his Upwork, will also start reporting payments that freelancers receive throughout the year.
If you earn income through payment apps, we recommend setting up a separate PayPal, Zelle, Cash App, or Venmo account for your professional transactions. This prevents non-taxable charges (transfers from family and friends) from being accidentally included on your 1099-K.
Will the IRS send my taxes to my family and friends?
There are rumors going around that the IRS is cracking down on money sent to family and friends through third-party payment apps, but that’s not true. Personal transactions involving gifts, favors, or reimbursements are not considered taxable. Examples of tax-free transactions include:
- Money received from family as a holiday or birthday gift
- Money received from a friend to cover one’s share of the restaurant bill
- Money received from a roommate or partner to pay rent or utilities
Payments reported on a 1099-K must be flagged as payments for goods or services from a vendor. If you select “Send money to family and friends,” it will not appear on your tax form. In other words, the money your roommate received for half of the restaurant bill is safe.
Do I have to pay taxes on items sold through Facebook Marketplace?
If you sell personal items for less than you paid and collect payment through a third-party payment app, these changes will not affect you. For example, if you buy a sofa for your home for $500 and then sell it on Facebook Marketplace for $200, you won’t owe taxes on the sale because it’s personal property that you sold at a loss. You may be required to provide documentation of the original purchase to prove that the item was sold at a loss.
If you have a side hustle that involves purchasing items through PayPal or other digital payment apps and reselling them for a profit, any income over $5,000 is considered taxable and will be reported to the IRS in 2024.
Keep good records of your purchases and online transactions to avoid paying taxes on untaxed income. If in doubt, consult a tax professional.
How to prepare for this reporting change
The payment app you use may ask you to verify your tax information, such as your Employer Identification Number, Individual Taxpayer Identification Number, or Social Security Number. If you run a business, you most likely have an EIN, but if you’re a sole proprietor, independent freelancer, or gig worker, you’ll likely provide an ITIN or SSN.
In some cases, receiving a 1099-K can alleviate some of the manual labor involved in filing self-employment taxes.
After this rule goes into effect, if you receive payments by direct deposit, check, or cash, you will continue to receive a separate 1099-NEC form. If you have multiple clients paying through PayPal, Venmo, Upwork, or other third-party payment apps and If you earn more than $5,000, you will receive one 1099-K instead of multiple 1099-NECs.
To avoid reporting confusion, be sure to track your earnings manually or using accounting software like Quickbooks.