This tax season, freelancers and side hustlers may receive an unknown form in the mail — IRS Tax Form 1099-K.
After two years of delays, the IRS is finally here implementing a change in tax reportingwhich requires third-party payment applications like PayPalVenmo and Cash App for issuing 1099-K for every earner income from self-employment through a certain amount through these applications every year. For the last year, if you earned $5,000 or more on a third-party application, you can expect to receive this tax form.
If you own your own business, freelance, or have side hustles, you're probably no stranger 1099 tax forms. You may have received a 1099-NEC (the IRS unemployment compensation form) from companies you have previously worked with. A 1099-K is similar, but instead of the company you work with issuing the form, you'll receive a tax form from the payment platform.
This is not a new tax rule – you are required report your freelance or self-employment income whether you receive a tax form or not. It's a tax reporting change that shifts the reporting requirement to payment applications so the IRS can better track income from income that might otherwise go unreported.
“The terms of taxation and tax treatment for taxpayers have not changed,” said Mark Steber, chief tax information officer for Jackson Hewitt. “This taxable income has always been considered by the IRS as taxable and should be reported on a tax return.
Although the IRS will be able to closely monitor your freelance income, 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 via 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 that reports income received through a third-party payment platform from non-permanent work, such as side hustles, a freelance contract, or a contractor position where taxes are not withheld.
The IRS is currently looking for any third party payment applications such as Cash App and Venmo to send a 1099-K to the IRS and individuals if they earned more than $20,000 in commercial payments in more than 200 transactions. If you regularly make over $20,000 in freelance income, pay through Venmo, and receive more than 200 payment transactions, you may have received a 1099-K tax form before.
What is the new IRS 1099-K rule?
Under new reporting requirements first announced in America's Rescue Plan, third-party payment apps will eventually be required to report earnings above $600 to the IRS.
“Prior to 2024, the earnings threshold was $20,000 and 200 transactions to get a 1099K tax document,” Steber said.
For your 2024 taxes (which you'll file in 2025), the IRS plans a phased rollout, requiring payment applications to report a freelancer and business owner earnings over $5,000 instead of $600. The hope is that raising the threshold will reduce the risk of inaccuracies while also giving the agency and payment applications more time to work toward the eventual $600 minimum.
Why was the third party payment application tax rule delayed?
Originally set to begin in early 2022, the IRS planned to implement a new reporting rule that would require third-party payment applications, such as PayPalVenmo or Cash App to report 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? It is not always easy to distinguish between taxable and non-taxable transactions through third-party applications. 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 delayed rollout gave the 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,” said IRS Commissioner Danny Werfel. Statement of November 2023.
What payment applications are required to send 1099-Ks?
All third parties payment applications where freelancers and business owners earn income are required to begin reporting transactions involving you to the IRS in 2024. Some popular payment apps include PayPal, Venmo, and Cash App. Other platforms that freelancers can use, such as Fivver or Upwork, are also ready to start reporting payments that 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 can prevent nontaxable expenses — money sent by family or friends — from being included on your 1099-K by mistake.
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-Kswhether or not you receive business funds through the service. That's because Zelle doesn't hold your funds in an account like PayPal, Venmo, or Cash App do, 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 Zelle, it is your responsibility to report all income on Schedule C of your tax return.
Does the IRS Tax the Money You Send to Family or Friends?
No. There are rumors that the IRS is preventing money sent to family and friends through third-party payment apps, but that's not true. Personal transactions involving gifts, services or fees are not considered taxable. Some examples of tax-free transactions include:
- Money received from a family member as a holiday or birthday gift
- Received money from a friend covering their portion of the restaurant bill
- Received money from your roommate or partner for their share of 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 may 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 each presidential candidate stands on the child tax credit
Will you owe tax 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 sales tax because it's a personal item that you sold at a loss. You may need 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 purchases and online transactions to avoid paying taxes on untaxed income — and when in doubt, contact a tax professional for help.
What should you do to prepare for this reporting change?
Any payment applications you use may ask you to verify your tax information, such as an employer identification number, individual tax identification number, or social security number. If you have a business, you likely have an EIN, but if you're a sole trader, individual freelancer, or gig worker, you'll provide an ITIN or SSN.
In some cases, receiving a 1099-K can take some of the manual work out of filing 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 will receive one 1099-K instead of multiple 1099-NECs.
To avoid any reporting confusion, make sure you track your earnings manually or with accounting software like Quickbooks.