New IRS 1099-K Tax Rule: Here’s What Freelancers Who Made Money on PayPal or Cash App Need to Know

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After two consecutive delays, the IRS is moving forward with a new tax reporting rule for freelancers who get paid through third-party apps. If you earn $5,000 or more through… PayPalOr Venmo, Cash App, or similar platforms, the IRS will now require these companies to issue it Tax Form 1099-K Details of your earnings.

This is not a new tax requirement; It’s a tax Preparing reports It changes. If you are Earn income independently or freelanceyou should already be paying taxes on your gross earnings, even if you don’t receive a Form 1099. The IRS is shifting reporting requirements to payment apps so you can monitor transactions that often 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 taxable income to be taxable and must be reported on the tax return. The new change requires online platforms to provide 1099-Ks to both their users and the IRS at a lower threshold than in previous years.”

The IRS will only require third-party apps to report earned income — the tax agency isn’t interested in the money you sent your family or friends to pay the rent or split the dinner bill.

If you earned $5,000 or more through third-party payment apps this year, you should receive a 1099-K to report your income when Submit your tax return In 2025. Here’s everything you need to know about this 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 no 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 IRS’s new 1099-K rule?

Under new reporting requirements first announced in the American Rescue Plan, third-party payment apps will eventually be required to report earnings over $600 to the IRS.

“Before 2024, the minimum was $20,000 in earnings and 200 transactions to receive a 1099-K 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 both the freelancer and the employer. Earnings of more than $5,000 Instead of $600. The hope is that raising the threshold will reduce the risk of inaccuracy while giving the agency and payment apps more time to work toward the final $600 minimum.

Why is the tax base for third-party payment apps so late?

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.

What payment applications are required to 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.

Does 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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