Last month, the Internal Revenue Service announced it was delaying a tax reporting law that would require third-party payment services such as PayPal, Venmo, Cash App and Zelle to report income over $600 to the IRS. This rule only applies to income received through payment apps, not money sent to friends and family. The tax rules were also postponed last tax season.
This story is part of 2023 taxesCNET covers the best tax software, tax tips, and everything else you need to file your return and track your refund.
IRS Commissioner Danny Wuerffel said in a November 21 press release, “We have spent months gathering feedback from third-party organizations and others, but we are unable to effectively implement the new reporting requirements.” It has become increasingly clear that additional time is needed.”
The IRS has decided to postpone the changes to prevent filing errors during the 2024 tax season. āA further delay to the 2023 tax year will avoid problems for taxpayers, tax professionals and others in this area,ā Werfel said.
What does this mean? If he earns more than $600 from a freelance client or side hustle and receives payment through a third-party payment app, he may not receive a tax Form 1099-K for his 2023 income. Instead, expect to receive a 1099-NEC from the company that hired you. Even if you don’t receive a 1099, you still need to report your freelance income on your tax return.
If you received payments of more than $20,000 on more than 200 transactions in 2023, you will receive a 1099-K.
Distribution of 1099-Ks to people with incomes of $600 or more has been temporarily suspended, but will be rolled out eventually. Perhaps he will be able to pay his taxes in 2024. With that in mind, if you’re a freelancer or own your own business, you may want to understand how this 1099-K tax policy will ultimately affect your taxes .
Learn what you need to know about 1099-Ks and how they will affect your taxes once the IRS rules go into effect.
Change in tax return
If you are… self-employed, regardless of how you receive payment for goods and services, you should already be paying taxes on your gross income.The new law is not a tax change, it’s a tax report This will allow the IRS to monitor transactions made through payment apps that often go unreported.
Before this law, third-party payment platforms only reported to tax authorities if their users made more than 200 business transactions and paid more than $20,000 in a year.
Once this rule goes into effect, a third-party payment company will issue you a 1099-K tax form each year if you earn more than $600 a year from goods and services. This tax form may include taxable and non-taxable transactions, especially if the account is used for both business and personal purposes.
To make it easier to manage your business’ finances, we recommend creating a separate PayPal, Zelle, Cash App, or Venmo account for your professional transactions.
The IRS doesn’t tax money you send to family and friends
There are rumors 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. Therefore, the money your roommate receives as half of the restaurant bill is safe.
Payment apps may ask you for tax information
If you receive payments via third-party apps, these platforms may contact you to verify your tax information, such as your Employer Identification Number, Individual Taxpayer Identification Number, and Social Security Number. If you run a business, you likely have an EIN, but if you’re a sole proprietor, independent freelancer, or gig worker, you’ll provide an ITIN or SSN.
If you regularly freelance, a 1099-K may reduce your tax forms
Here’s some good news. Once this rule goes into effect, receiving a 1099-K could alleviate some of the manual labor involved in filing self-employment taxes. Currently, if you are self-employed, you receive a 1099-NEC tax form from each individual client you work for when your income exceeds $600.
Even though this rule goes into effect, you will still receive a separate 1099-NEC form if you received a payment by direct deposit, check, or cash, but you will still receive a separate 1099-NEC form through that particular payment app. It will include payments from all paying customers. This means that if he works for 5 clients in 2024, and one pays him by direct debit and the other four pay him through PayPal, he should receive two tax returns instead of five. Get one 1099-NEC for your direct deposit client and one 1099-K from PayPal to pay for the other four clients.
This eliminates the need to spend time tracking down documents and totaling payments to third parties.
Products sold at a loss on Facebook Marketplace are not taxed
If you sell your personal property for less than you paid for it and collect payment through a third-party payment app, this new law 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 don’t owe taxes on that sale. This is because it was a personal item that I sold at a loss. However, you may be required to provide documentation of the original purchase to prove that you sold the item at a loss.
PayPal or Another digital payment appAfter that, any earnings over $600 are considered taxable and reported to the IRS.
Keep good records of your purchases and online transactions to avoid paying taxes on untaxed income. If in doubt, consult a tax professional.