If You Were Paid via PayPal, Venmo or Cash App This Year, You Should Know About This New IRS Tax Rule
Freelancers, side hustlers, and contractors who get paid to serve PayPalVenmo or Cash App may receive a different tax form this year in January.
The IRS confirmed in a statement November 26 press release The third-party payment application will need to send you and the IRS Tax Form 1099-K If your tax-free income exceeds $5,000 this year and Payment is made through a payment app. You will then report your income using a 1099-K Submit your tax return 2025.
The new tax reporting rule, first announced in 2021, is designed to capture income over $600 paid through third-party payment apps. It was originally scheduled to go live in 2022, but was delayed two years in a row. In 2023, the IRS announced that 2024 would be a transitional tax year to give payment applications more time to prepare for the changes. Only individuals who earn more than $5,000 through third-party applications will receive a 1099-K instead of the $600 minimum.
The tax agency announced that 2025 will be another transition year, with the minimum lowering to $2,500 next year and then to $600 in 2026. In previous years, the minimums were much higher.
“Prior to 2024, the income threshold to obtain a 1099-K tax filing is $20,000 and 200 transactions,” said Mark Steber, chief tax information officer at Jackson Hewitt.
if you Earn freelance or self-employment incomeyou should have paid taxes on your total income even if you did not receive a 1099 form. This is not a new tax requirement; this is a tax Report Change. The IRS will shift reporting requirements to payment apps so it can keep an eye on transactions that often go unreported. If you’re making money with third-party payment apps this year, here’s what you need to know.
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What is a 1099-K?
one 1099-K is a tax form This report reports income earned through third-party payment platforms from non-permanent employment, such as side hustles, freelance agreements, or contractor positions that do not withhold taxes.
The IRS currently requires any Third-party payment application Cash App and Venmo, for example, can send a 1099-K to the IRS and individuals if they receive more than $20,000 in business payments across more than 200 transactions. If your freelance income regularly exceeds $20,000, is paid through Venmo, and receives more than 200 payment transactions, you may have received a 1099-K tax form before.
What are the new IRS 1099-K reporting rules?
Third-party payment apps will eventually be required to report income over $600 to the IRS under new reporting requirements first announced under the American Rescue Plan.
For 2024 taxes (you’ll file in 2025), the IRS is planning a phased rollout requiring payment applications to report freelancers and business owners Earn more than $5,000 instead of $600. The hope is that raising the threshold will reduce the risk of inaccuracies while also giving agencies and payment apps more time to meet the final $600 minimum.
“Taxpayer tax and tax treatment requirements have not changed,” Steber said. “This taxable income has always been considered taxable income by the IRS and should be reported on tax returns. The new changes require online platforms to provide 1099-Ks to their users and the IRS at a lower threshold than in previous years.”
Why is Rule 1099-K delayed?
Originally scheduled to launch in early 2022, the IRS plans to implement a new reporting rule that would require third-party payment applications, such as PayPalVenmo or Cash App report annual income of $600 or more Go to the tax authority. The IRS has delayed this new reporting requirement in 2022 and again in 2023.
Why? It’s not always easy to distinguish taxable transactions from non-taxable transactions through third-party applications. For example, the money your roommate sends you for dinner via Venmo is not taxable, but the money you receive for a graphic design project may be. The delayed launch gives payment platforms more time to prepare.
“We have spent months gathering feedback from third-party groups and others, and it has become increasingly clear that we need to do more,” IRS Commissioner Danny Werfel said in a statement. more time to effectively implement the new reporting requirements.” November 2023 Statement.
What payment applications are covered by this IRS rule?
All third parties payment app Freelancers and business owners who earn income must start reporting transactions involving you to the IRS in 2024. Some popular payment apps include PayPal, Venmo, and Cash App. Other platforms that freelancers may use, such as Fivver or Upwork, are also obliged to start reporting payments that freelancers receive throughout the year.
If you make money through a payment app, it’s a good idea to set up a separate PayPal, Cash App, or Venmo account for your professional transactions. This prevents non-taxable expenses (money sent from family or friends) from being mistakenly included on your 1099-K.
Zelle users will not receive 1099-K
There is one popular payment app that is not subject to the 1099-K rule. Payment transfer services Zelle will not issue 1099-Kregardless of whether you receive business funds through the Service. That’s because Zelle doesn’t hold your money in an account like PayPal, Venmo, or Cash App, but instead serves as a way to transfer money between bank accounts. If you receive compensation for freelance or small business services through Zelle, you are responsible for reporting all income on Schedule C of your tax return.
Will the IRS tax money sent to family or friends?
No. There are rumors that the IRS is cracking down on sending money to family and friends through third-party payment apps, but that’s not the case. Personal transactions involving gifts, favors or reimbursements are not considered taxable. Some examples of tax-free transactions include:
- Money received as holiday or birthday gifts from family members
- Money received from friends used to pay part of their restaurant bill
- Payments received from your roommate or partner for your share of rent and utility bills
Payments to be reported on the 1099-K must be labeled as payments for goods or services from the supplier. When you choose to “send money to family or friends,” the money won’t appear on your tax form. In other words, it’s safe for your roommate to give her half of the restaurant bill.
“This only applies to self-employment income,” Steber said. “You should not receive a 1099-K for personal transactions, but please note that some platforms may accidentally include personal transactions on a 1099-K, which will require a correction on the user’s tax return.”
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Do I need to pay tax on items sold on Facebook Market?
If you sell personal items for less than the purchase price and collect fees through a third-party payment app, these changes will not affect you. For example, if you bought a home sofa for $500 and then sold it on Facebook Marketplace for $200, you wouldn’t pay sales tax because it was a personal item you sold at a loss. You may need to show documentation of the original purchase to prove you sold the item at a loss.
If you have a side hustle, buy items through PayPal or resell them for profit Another digital payment appthen income over $5,000 will be considered taxable and reported to the IRS in 2024.
Make sure to keep good records of your purchases and online transactions to avoid paying taxes on any non-taxable income—and when in doubt, contact a tax professional for help.
How to prepare for this reporting change
Any payment application you use may ask you to confirm your tax information, such as your employer identification number, personal tax identification number, or social security number. If you own a business, you most likely have an EIN, but if you’re a sole proprietor, self-employed, or gig worker, you’ll provide an ITIN or SSN.
In some cases, Received 1099-K It may take some of the manual work out of filing your self-employment tax return.
After this rule goes into effect, you may still receive an individual 1099-NEC form if you pay by direct deposit, check, or cash. If you have multiple customers paying you through PayPal, Venmo, Upwork, or other third-party payment apps and If your income exceeds $5,000, you will receive one 1099-K instead of multiple 1099-NECs.
To avoid any reporting confusion, make sure you track your income manually or using accounting software like Quickbooks.
