Getting paid via PayPal, Venmo or Cash App? The IRS wants to know about it.

Did you work part-time or freelance work this year and get paid via PayPalVenmo, Cash App or another third party payment app? If so, then you may have new rules to follow when filing a tax return next year.

You will receive tax form 1099-K if you earned more than $5,000 in tax-free income in 2024 and received payment through a third-party payment application. The rule has been delayed for two years in a row, and 2024 will be a transition year to help payment apps prepare for the new reporting requirements.

It is possible that the IRS will decide to delay implementation of this rule again or change the threshold. At this time, you should plan ahead to ensure you are prepared for your taxes.

If you self employedyou already owe taxes on your total income, even if you don’t receive a 1099 on all of your income. This is not a new rule; this is a tax reporting change. The IRS will shift reporting requirements to payment applications to be able to track transactions that often go unreported. If you got paid through third-party payment apps this year, here’s what you need to know.

Read more: The IRS’s updated federal tax brackets could boost your paycheck next year. That’s why

What is a 1099-K?

A 1099-K – tax form which reports income received through a third-party payment platform from non-regular work, such as a part-time job, freelance contract, or contractor position, for which taxes are not withheld.

The IRS currently requires any third party payment apps such as Cash App and Venmo to send Form 1099-K to the IRS and individuals if they earned more than $20,000 in business 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 payment transactions, you may have received a 1099-K tax form before.

What is the new IRS 1099-K reporting rule?

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

For your 2024 taxes (which you’ll file in 2025), the IRS is planning a phased rollout, requiring payment apps to report freelancer and business owner status. earnings more than $5000 instead of 600 dollars. The hope is that raising the threshold will reduce the risk of inaccuracy and also give the agency and payment apps more time to work toward the possible $600 minimum.

Why was Rule 1099-K delayed?

The IRS was originally scheduled to take effect in early 2022, but the IRS planned to implement a new reporting rule that would require the use of third-party payment applications such as PayPalVenmo, Cash App or Zelleto report income of more than $600 or more per year to the tax authority. But the IRS delayed implementing the new reporting requirement in 2022 and again in 2023.

Why? Distinguishing between taxable and non-taxable transactions using third-party applications is not always easy. For example, the money your roommate sends you through Venmo for dinner is not taxable, but money received for a graphic design project may be taxable. The delay in implementation gave payment platforms more time to prepare.

“We spent many months gathering feedback from third-party groups and others, and it became increasingly clear that we needed additional time to effectively implement the new reporting requirements,” IRS Commissioner Danny Werfel said in the report. November 2023 Statement.

What payment applications are included in this IRS rule?

All third parties payment applications where freelancers and business owners earn income must begin reporting transactions involving you to the IRS in 2024. Some popular payment apps include PayPal, Venmo, Zelle, and Cash App. Other platforms that freelancers can use, such as Fivver or Upwork, are also ready to start reporting the payments that freelancers receive throughout the year.

If you earn income through payment apps, it’s a good idea to create separate PayPal, Zelle, Cash App, or Venmo accounts for your professional transactions. This can prevent you from mistakenly including non-taxable payments (money sent by relatives or friends) on your Form 1099-K.

Is IRS tax money sent to relatives or friends?

No. There have been rumors that the IRS is tightening controls on money sent to family and friends through third-party payment apps, but that’s not true. Personal transactions involving gifts, services or reimbursements 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 to cover his portion of a restaurant bill
• Money received from your roommate or partner for their share of rent and utilities.

Payments that will be reported on Form 1099-K must be marked as payments for goods or services from a supplier. When you select “send money to family or friends,” it won’t appear on your tax form. In other words, your roommate’s money on half the restaurant bill is safe.

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Will you pay taxes on items sold through Facebook Marketplace?

If you sell personal items for less than you paid for them and receive money through third-party payment apps, these changes will not affect you. For example, if you buy a sofa for your home for $500 and then 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 hustle: you buy goods and resell them for a profit via PayPal or another digital payment appthen income over $5,000 will be considered taxable and reported to the IRS in 2024.

Be sure to keep good records of your purchases and online transactions to avoid paying taxes on any untaxed income, and when in doubt, seek help from a tax professional.

How to prepare for this reporting change

Any payment apps you use may ask you to verify your tax information, such as your employer identification number, individual taxpayer identification number, or social security number. If you own a business, you most likely have an EIN, but if you are a sole proprietor, self-employed freelancer, or worker, you must provide an ITIN or SSN.

In some cases receiving 1099-K There may be some manual work involved in filing your self-employment taxes.

Once this rule goes into effect, you will still be able to 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 certificate instead of multiple 1099-NEC certificates.

To avoid reporting confusion, make sure you track your income manually or using accounting software such as Quickbooks.

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