Implementation of the IRS's 1099-K reporting changes has been slow, leaving freelancers with many questions.
Originally scheduled to begin in early 2022, the IRS will require third-party payment apps such as PayPal, Venmo, Cash App, and Zelle to report annual income of $600 or more to the Internal Revenue Service. Reporting rules were to be introduced. Tax office.
Last November, the IRS announced a postponement of this rule for the second year in a row. why? It is not always easy to distinguish between taxable and non-taxable transactions through third-party apps. For example, the money your roommate sends you via Venmo for dinner isn't taxed, but the money you receive for a graphic design project is. The suspension gives payment platforms more time to prepare.
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.”
When will new tax requirements be introduced? And what should you expect when filing your taxes if you earn money through PayPal or other payment platforms in 2023? What you need to know heading into tax season I'll introduce you to everything.
What is the IRS $600 payment rule?
Under new reporting requirements first announced in the American Rescue Plan, third-party payment apps will eventually be required to report revenue over $600 to the IRS.
The IRS plans to phase in payment apps that will require freelancers and business owners to report income of $5,000 or more instead of $600 for 2024 taxes (to be filed in 2025). 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.
Previously, third-party apps only sent 1099-Ks to users who received $20,000 in commercial payments for more than 200 transactions.
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. That means if you earn freelance income, you'll report your income as usual when you file your 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 rules mean for your 2024 tax return
For the 2024 tax year, if you earn more than $5,000 from a side job through a freelance client or third-party payment app, you will receive a tax Form 1099-K and the taxes you will file in 2025. affects. The IRS may decide again. This requirement can be changed by delaying this rule or changing 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 report 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.