New IRS 1099-K Tax Rule: Here’s What Freelancers Who Made Money With 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 are paid through third-party apps. If you have made $5000 or more through PayPalVenmo, Cash App or similar platforms, the IRS will now require these companies to issue tax form 1099-K with details of your income.
This is not a new tax requirement; it’s a tax reporting change. If you earn income freelancing or self-employmentyou already have to pay taxes on your gross income even if you don’t receive a Form 1099. The IRS is switching the reporting requirement to payment apps so it can track transactions that often go unreported.
“The requirements for taxation and the tax treatment of taxpayers have not changed,” said Mark Steber, chief tax information officer for Jackson Hewitt. “This taxable income has always been considered taxable by the IRS and must be reported on a 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 doesn’t care about the money you sent your family or friends to pay rent or split the dinner bill.
If you earned $5,000 or more through third-party payment apps this year, you must receive a 1099-K to report your earnings when file your tax return in 2025 Here’s everything you need to know about this reporting change.
Read more: Updated IRS federal tax brackets can boost your paycheck next year. That’s why
What is a 1099-K?
A A 1099-K is a tax form which reports income received through a third-party payment platform from non-permanent work such as a side job, freelance contract or contractor position where no taxes are withheld.
The IRS currently requires 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 merchant payments through more than 200 transactions. If you regularly make over $20,000 in freelance income, receive payments 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 the new reporting requirements first announced in the US bailout, third-party payment apps will eventually have to report revenue over $600 to the IRS.
“Before 2024 the revenue threshold was $20,000 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 apps to report freelancers and business owners profit over $5,000 instead of $600. The hope is that raising the threshold will reduce the risk of inaccuracies while giving the agency and payment apps more time to work toward the eventual $600 minimum.
Why was the third party payment app tax rule delayed?
Originally scheduled 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 $600 or more per year to the tax agency. The IRS has delayed this new reporting requirement until 2022. and again in 2023.
why Differentiating 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 rollout 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 November 2023 Statement.
Which payment applications are required to send 1099-Ks?
All third parties payment applications where freelancers and business owners receive income must 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 business transactions. This can prevent tax-free payments — money sent by family or friends — from being mistakenly 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-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, but 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 spread 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, services or refunds are not considered taxable. Some examples of tax-free transactions include:
- Money received from a family member as a holiday or birthday gift
- Money received from a friend covering their portion of a restaurant bill
- Money received from your roommate or partner for their share of the rent and utilities
Payments that will be reported on the 1099-K must be marked as payments for goods or services from the supplier. When you select “send money to family or friends”, it will not appear on your tax form. In other words, that money from your roommate for her half of the restaurant bill is safe.
“It’s just for self-employment income,” Steber said. “You should not receive a 1099-K for personal transactions, but be aware that some platforms may accidentally include personal transactions on 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 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 taxes on the sale 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 business where you buy items and resell them for profit through PayPal or another digital payment appthen 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 tax 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 verify your tax information, such as an employer identification number, an individual tax identification number, or a 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, receiving a 1099-K can reduce some of the manual work involved in filing self-employment taxes.
After this rule goes into effect, you may still receive individual Forms 1099-NEC if you received payment by direct deposit, check, or cash. If you have multiple customers paying you through PayPal, Venmo, Upwork, or other third-party payment apps and earn more than $5,000, you’ll get one 1099-K instead of multiple 1099-NECs.
To avoid confusion when reporting, make sure you track your income manually or with accounting software like Quickbooks.
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