After consecutive delays, the IRS will adopt a new tax reporting rule for freelancers paid through third-party apps. If you earned $5,000 or more from PaypalVenmo, Cash App or a similar platform, the IRS will now require these businesses to issue tax form 1099-K detailing your winnings.

This is not a new tax rule; it’s a tax report change. If you earn self-employed or self-employed incomeyou should already report and pay taxes on your total income, even if you don’t receive a 1099. The IRS is simply shifting the reporting requirement to payment apps so it can keep tabs on transactions that otherwise might not be declared.

“The requirements for taxation and tax treatment for taxpayers have not changed,” said Mark Steber, chief tax information officer at Jackson Hewitt. “This taxable income has always been considered by the IRS to be taxable and must be reported on a tax return.”

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

If you earned $5,000 or more from third-party payment apps this year, you should receive a 1099-K to use to report your income when you file your tax return in 2025. Here’s everything you need to know about this reporting change.

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What is a 1099-K?

A 1099-K is a tax form that reports income received through a third-party payment platform from non-permanent employment, such as a side hustle, freelance contract, or contractor position for which taxes are not withheld.

The IRS currently requires all third-party payment apps like Cash App and Venmo to send a 1099-K to the IRS and individuals if they earned more than $20,000 in business payments on more than 200 transactions. If you regularly earn more than $20,000 in self-employment income, get paid via Venmo, and receive more than 200 payment transactions, you may have already received a 1099-K tax form.

What is the new IRS 1099-K 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.

“Prior to 2024, the income 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. earnings 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 reach the eventual $600 minimum.

Why was the tax rule on third-party payment apps delayed?

Originally scheduled for early 2022, the IRS planned to implement a new reporting rule that would require third-party payment apps, like PaypalVenmo or Cash App to report income over $600 or more per year to the tax agency. The IRS delayed this new reporting requirement to 2022 and then again to 2023.

For what? 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 isn’t taxable, but money received for a graphic design project might be. The delay in deployment 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 more time to effectively implement the new reporting requirements,” said IRS Commissioner Danny Werfel in a statement. November 2023 Statement.

What payment apps are needed to send 1099-Ks?

All third parties payment apps where freelancers and business owners earn income must begin reporting transactions about 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, must also begin 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, Cash App, or Venmo accounts for your business transactions. This could prevent non-taxable fees (money sent from family or friends) from being mistakenly included on your 1099-K.

Zelle users will not receive a 1099-K

There is a popular payment app that is exempt from the 1099-K rule. Payment transfer service Zelle will not issue a 1099-Kwhether or not you receive professional funds through the Service. This is 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?

Rumors have swirled 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, favors or reimbursements are not considered taxable. Here are some examples of non-taxable transactions:

• Money received from a family member as a holiday or birthday gift
• Money received from a friend covering their share of a restaurant bill
• Money received from your roommate or partner for their share of rent and utilities

Payments that will be reported on a 1099-K must be reported 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, your roommate’s money for their half of the restaurant bill is safe.

“This only concerns self-employment income,” Steber said. “You should not receive a 1099-K for personal transactions, but be aware that some platforms might accidentally include personal transactions in the 1099-K and this will need to be corrected on users’ tax return.”

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Will you owe taxes if you sell items on Facebook Marketplace or Poshmark?

If you sell personal items for less than you paid and collect the 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 resell it on Facebook Marketplace for $200, you will not owe taxes on the sale because it is a personal item that you have 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 of purchasing items and reselling them for a profit through PayPal or another digital payment appthen income over $5,000 will be considered taxable and 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 non-taxable income – and if in doubt, contact a tax professional for help.

What should you do to prepare for this reporting change?

Any payment apps you use may ask you to confirm your tax information, such as your Employer Identification Number, Individual Taxpayer Identification Number, or Social Security number. If you own a business, you likely have an EIN, but if you are a sole proprietor, self-employed, or gig worker, you will provide an ITIN or SSN.

In some cases, receive a 1099-K can simplify some of the manual work of 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 paying you via 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 reporting confusion, be sure to track your income manually or with accounting software such as Quickbooks.

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