The IRS is starting a new tax rule for Venmo, PayPal, and CashApp. What you need to know

Listen up, independents. This tax season, you may receive a Tax Form 1099-K If you earn more than $5,000 through a third-party payment app like PayPal, Venmo, or Cash App.

The IRS originally rolled out a plan to implement new reporting requirements for anyone earning more than $600 via payment apps in 2023. After two years of delays, the tax agency decided Implement a gradual rolloutraising the reporting limit to $5,000 for the 2024 tax year.

This reporting change means that if you earned more than $5,000 on an app like Venmo last year, the payment platform will send you a 1099-K form to the IRS. This gives the IRS a clearer picture of how much you earned in untaxed income this year, to make sure you’re paying the right amount of taxes.

If you earn Self-employment or self-employment incomeYou’re probably no stranger to this 1099 tax forms. Even if you don’t get a 1099 for the untaxed income you earned, you must report any Net profit over $400 To the IRS when Submit your tax return. The 1099-K tax change imposes reporting requirements on payment applications so the IRS can keep better tabs on income gains that may go unreported.

“Tax requirements and the tax treatment of taxpayers have not changed,” said Mark Steber, chief tax information officer at Jackson Hewitt. “The IRS has always considered this income to be taxable and must be reported on the tax return.”

While the IRS will be able to keep a close eye on freelancers’ earnings, the tax agency is not interested in the money you send to your family and friends. If you pay your roommate your portion of the rent through Venmo, for example, those transactions are not considered taxable.

Here’s everything you need to know about the new 1099-K tax reporting change.

Read more: The IRS’s updated federal tax brackets could increase your paycheck next year. And here’s why

What is a 1099-K?

A 1099-K is a tax form Reports income received via a third-party payment platform from a non-permanent job, such as a side hustle, freelance agreement, or contractor position where taxes are not withheld.

The IRS currently requires neither Third-party payment applications Such as Cash App and Venmo to send a 1099-K to the IRS and individuals if they earn more than $20,000 in merchant payments across more than 200 transactions. If you regularly earn more than $20,000 in freelance income, get paid through Venmo, and receive more than 200 batch transactions, you’ve probably received a 1099-K tax form before.

What is the 1099-K reporting limit for tax year 2024?

For your 2024 taxes (which you’ll file in 2025), the IRS plans a phased rollout, requiring payment applications to report both the freelancer and the employer. Earnings of more than $5,000 .

“Before 2024, the minimum was $20,000 in earnings and 200 transactions to receive a 1099-K tax document,” Steber said.

Why is the IRS 1099-K tax rule delayed?

Originally scheduled to begin in early 2022, the IRS planned to implement a new reporting rule that would require third-party payment apps, such as PayPalOr Venmo or Cash App to report income of $600 or more per year To the tax agency. The IRS delayed these new reporting requirements in 2022 and again in 2023.

Why? Distinguishing between taxable and non-taxable transactions through third-party applications is not always easy. For example, money your roommate sends you via Venmo for dinner is not taxable, but money received for a graphic design project may be. The delay in the rollout gave payment platforms more time to prepare.

“We have spent several months gathering feedback from outside groups and others, and it has become increasingly clear that we need additional time to effectively implement the new reporting requirements,” IRS Commissioner Danny Werfel said. November 2023 statement.

Which Payment Apps Send 1099-Ks?

Every third party Payment applications Freelancers and income-earning business owners are required to start reporting transactions involving you to the IRS in 2024. Some popular payment apps include PayPal, Venmo, and Cash App. Other platforms freelancers may use, such as Fivver or Upwork, are also handy to start reporting the payments freelancers receive throughout the year.

If you earn income through payment apps, it’s a good idea to set up separate PayPal, Cash App, or Venmo accounts for your professional transactions. This may prevent untaxed charges — money sent from family or friends — from being accidentally included on your 1099-K.

Zelle users will not receive a 1099-K

There is one popular payment application that is exempt from the 1099-K rule. Payment transfer service Zelle will not issue 1099-KsRegardless of whether you receive business funds through the Service or not. This is because Zelle doesn’t hold your money in an account, like PayPal, Venmo, or Cash App, and instead is used as a way to transfer money between bank accounts. If you are paid for your freelance or small business services through Zelle, it is your responsibility to report all income on Schedule C of your tax return.

Will the IRS tax money you send to family or friends?

No, rumors have been circulating that the IRS has been cracking down on money sent to family and friends through third-party payment apps, but that’s not true. Personal transactions involving gifts, services or compensation are not considered taxable. Some examples of non-taxable transactions include:

• Money received from a family member as a holiday or birthday gift
• Money received from a friend to cover his portion of the restaurant bill
• Money received from your roommate or partner for their share of the rent and utilities

Payments to be reported on the 1099-K must be marked as payments for goods or services provided by the seller. When you select “Send money to family or friends,” it won’t appear on your tax form. In other words, the money you got from your roommate for half the restaurant bill is safe.

“This is only for self-employment income,” Steber said. “You should not receive a 1099-K for personal transactions but be aware that some platforms may mistakenly include personal transactions on the 1099-K and this will need to be corrected on users’ tax return.”

Read more: 2024 Election: Where does each presidential candidate stand on the child tax credit?

Will you owe taxes if you sell items on Facebook Marketplace or Poshmark?

If you sell personal items for less than you paid for them and collect money through third-party payment apps, these changes won’t affect you. For example, if you buy a sofa for your home for $500 and later sell it on Facebook Marketplace for $200, you won’t owe taxes on the sale because it’s a personal item that you sold at a loss. You may be asked to show original purchase documentation to prove that you sold the item at a loss.

If you have a side hustle where you can buy items and resell them for profit via PayPal or Another digital payment appEarnings over $5,000 will be considered taxable and will be reported to the IRS in 2024.

Make sure you keep a good record of your online purchases and transactions to avoid paying taxes on any untaxed income — and when in doubt, contact a tax professional for help.

What should you do to prepare for this change in reporting?

Any payment apps you use may ask you to confirm your tax information, such as your employer identification number, individual tax identification number, or Social Security number. If you own a business, you’ll likely have an Employer Identification Number (EIN), but if you’re a sole proprietor, solo freelancer, or gig worker, you’ll provide an Employer Identification Number (ITIN) or Social Security Number (SSN).

In some cases, Receive a 1099-K It may take some manual work out of filing your self-employment taxes.

Once this rule goes into effect, you may still receive individual 1099-NEC forms if you were paid by direct deposit, check, or cash. If you have multiple clients who pay you 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 any reporting confusion, be sure to track your earnings manually or using accounting software like Quickbooks.

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