Listen up, freelancers. This tax season, you may receive a 1099-K tax form If you earned more than $5,000 through a third-party payment app, such as PayPal, Venmo, or Cash App.
The IRS initially laid out a plan to implement new reporting requirements for anyone who earns more than $600 through pay applications in 2023. After two years of delays, the tax agency decided to Implement phase reversalRaising the reporting threshold to $5,000 for the 2024 tax year.
This reporting change means if you earned over $5,000 on an app like Venmo last year, the payment platform will send you a 1099-K form. This gives the IRS a clearer picture of how much you earned in unearned income this year, so you can make sure you're paying the correct amount in taxes.
If you earn freelance or self-employment incomeyou are probably no stranger 1099 tax forms. Even if you don't get a 1099 for unearned income you've earned, you're still required to report Net earnings over $400 USD of the IRS when you are File your tax return. The 1099-K tax change puts a reporting requirement on payment applications so the IRS can keep better tabs on earnings that might otherwise be nice.
“The taxation requirements and tax treatment for taxpayers have not changed,” said Mark Steber, chief tax information officer for Jackson Hewitt. “This income has always been considered taxable by the IRS and should be reported on a tax return.”
While the IRS will be able to keep an eye on freelance earnings, the tax agency is not interested in the money you send to your family and friends. If you pay your roommate your share of the rent through Venmo, for example, these 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 boost your paycheck next year. Here's why
What is a 1099-k?
A A 1099-K is a tax form It reports income received through a third-party payment platform from non-permanent work, such as a side hustle, freelance contract, or contractor position where taxes are not withheld.
The IRS is currently seeking Third-party payment applications How Cash App and Venmo send a 1099-K to the IRS and individuals if they earn more than $20,000 in commercial payments in more than 200 transactions. If you regularly make over $20,000 in freelance income, get paid through VENMO, and receive more than 200 payment transactions, you may have received a 1099-K tax form.
What is the 1099-K reporting threshold for tax year 2024?
For your 2024 taxes (which you'll file in 2025), the IRS plans to phase in, require payment applications to report freelancers and business owners Earnings over $5,000 .
“Before 2024
Why is the IRS 1099-K tax rule delayed?
Originally set to begin in early 2022, the IRS plans to implement a new reporting rule that will require third-party payment applications such as PayPalVenmo or Cash App for reporting income of over $600 or more per year to the tax agency. The IRS delayed this new reporting requirement to 2022 and again to 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 isn't taxable, but money received for a graphic design project might be. The delayed rerouting gave payment platforms more time to prepare.
“We have spent many months gathering feedback from third-party 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 in A. Statement for November 2023.
Which payment apps send 1099-kg?
All third parties Payment applications Where freelancers and business owners receive income, they are required to begin reporting involving transactions to the IRS in 2024. Some popular payment apps include PayPal, Venmo and Cash app. Other platforms freelancers can use, such as Fivver or Upwork, are also on the hook to start reporting payments freelancers receive throughout the year.
If you earn income through payment apps, it's a good idea to set up separate PayPal, Cash, or VENMO accounts for your professional transactions. This can prevent erratic expenses—money sent from family or friends—from being included in error on your 1099-K.
Zell users will not receive a 1099-K
There is one popular payment application that is exempt from the 1099-K rule. Payment transfer service Zell will not issue 1099-kgwhether or not you receive business funds through the service. That's because Zell doesn't hold your funds in an account like PayPal, Venmo, or the Cash App, and is instead used as a way to transfer money between bank accounts. If you are paid for your freelance or small business services through Zell, it is your responsibility to report all income on Schedule C of your tax return.
Will you be sending your IRS tax money to family or friends?
No. Rumors have circulated 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 fees are not considered taxable. Some examples of immutable transactions include:
- Money received from a family member as a holiday or birthday gift
- Money received from a friend to cover their share 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 from the vendor. When you choose “Send money to family or friends,” it won't show up on your tax form. In other words, that money from your roommate for her half of the restaurant bill is safe.
“This is for self-employment income only,” Steber said. “You should not receive a 1099-K for personal transactions, but be aware that some platforms might accidentally include personal transactions in the 1099-K and this will need to be corrected on the users' tax return.”
Read more: Election 2024: Where every presidential candidate is pushing for 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 the money through third-party payment apps, these changes won't affect you. For example, if you buy a couch for your home for $500 and later sell it on Facebook Marketplace for $200, you won't owe tax on the sale because it's a personal item that you sold at a loss. You may be required to show documentation of the original purchase to prove that you sold the item at a loss.
If you have a side hustle where you buy items and resell them for profit through PayPal or Another digital payment applicationthen earnings over $5,000 will be considered taxable and reported to the IRS in 2024.
Make sure you keep good records of your online purchases and transactions to avoid paying taxes on any disposable income—and when in doubt, contact a tax professional for help.
What should you do to prepare for this change in reporting?
Any payment applications you use may ask you to verify your tax information, such as your employer identification number, individual tax identification number, or social security number. If you own a business, you likely have an EIN, but if you're a sole proprietor, individual freelancer, or freelancer, you'll provide an ITIN or SSN.
In some cases, receiving 1099-k It can take a portion of the manual to file your self-employment taxes.
After this rule goes into effect, you may still receive individual Forms 1099-NEC if you were paid by direct deposit, check, or cash. If you have multiple customers who pay you through PayPal, Venmo, Upwork, or other third-party payment apps and You earn more than $5,000, you'll get one 1099-K instead of multiple 1099-NECs.
To avoid any reporting confusion, make sure you track your earnings manually or with accounting software such as QuickBooks.