The IRS plans to lastly implement its new 1099-Ok reporting requirement this yr. Which means anybody who receives $5,000 or extra in earnings through third-party cost apps equivalent to PayPal, Venmo, Money App or Zelle in 2024 will obtain a 1099-Ok subsequent yr.
Initially slated to take impact in 2022, this IRS reporting change will ultimately have cost apps report earnings over $600 to the tax company. Beforehand, third-party apps solely despatched 1099-Ks to customers who obtained $20,000 in business funds throughout greater than 200 transactions.
In your 2024 taxes (which you may file in 2025), the IRS is planning a phased rollout, requiring cost apps to report freelancer and enterprise proprietor earnings over $5,000 as a substitute of $600. The hope is that elevating the edge will cut back the chance of inaccuracies whereas additionally giving the company and cost apps extra time to work towards the eventual $600 minimal.
The IRS has delayed this new reporting rule for 2 years in a row to offer cost apps extra time to organize for the change. One sticking level: Distinguishing between taxable and nontaxable transactions by means of third-party apps is not all the time simple. For instance, cash your roommate sends you thru Venmo for dinner is just not taxable. Cash obtained for graphic design work you tackled is. The IRS paused implementation to keep away from confusion and incorrect earnings being reported.
“We spent many months gathering suggestions from third-party teams and others, and it grew to become more and more clear we want extra time to successfully implement the brand new reporting necessities,” mentioned IRS Commissioner Danny Werfel in a November 2023 assertion.
All the pauses and adjustments have left many freelancers confused over what to anticipate for this tax season and past. Should you earn self-employment earnings, this is what it’s good to know.
What’s the IRS $600 cost rule?
Underneath new reporting necessities first introduced within the American Rescue Plan, third-party cost apps will probably be required to report earnings over $600 to the IRS. For 2024, solely earnings over $5,000 will probably be reported.
Should you’re self-employed, you need to already be paying taxes in your whole earnings, even in case you do not obtain a 1099 from your whole earnings. This is not a brand new rule; it is a tax reporting change. The IRS will probably be switching the reporting requirement to cost apps so it may possibly preserve tabs on transactions that usually go unreported.
What the IRS 1099-Ok change means on your 2023 tax return
The IRS paused this reporting requirement for 2023. After all, in case you earn freelance earnings, you are still required to report your earnings for the 2023 tax yr if you file your taxes this yr. You simply will not obtain a 1099-Ok kind from third-party apps until you obtain over $20,000 in funds throughout over 200 transactions in 2023.
As an alternative, it’s possible you’ll obtain 1099-NECs from any companies you’re employed with. Even in case you do not obtain a tax kind from a consumer, you are still on the hook for reporting your whole self-employment earnings.
What the IRS 1099-Ok rule means on your 2024 tax return
As of now, for tax yr 2024, you may obtain tax kind 1099-Ok in case you earn greater than $5,000 from a contract consumer or aspect hustle by means of third-party cost apps, affecting the taxes you may file in 2025. The IRS might determine to once more delay this rule or alter the edge, so this requirement may nonetheless change.
What cost apps are included on this IRS rule?
All third-party cost apps the place freelancers and enterprise house owners obtain earnings are required to start reporting transactions involving you to the IRS in 2024. Some common cost apps embrace PayPal, Venmo, Zelle and Money App. Different platforms freelancers might use, equivalent to Fivver or Upwork, are additionally on the hook to start reporting funds that freelancers obtain all year long.
Should you earn earnings by means of cost apps, it is a good suggestion to arrange separate PayPal, Zelle, Money App or Venmo accounts on your skilled transactions. This might forestall nontaxable costs — cash despatched from household or associates — from being included in your 1099-Ok in error.
Will the IRS tax cash despatched to household or associates?
Rumors have circulated that the IRS was cracking down on cash despatched to household and associates by means of third-party cost apps, however that is not true. Private transactions involving presents, favors or reimbursements will not be thought of taxable. Some examples of nontaxable transactions embrace:
- Cash obtained from a member of the family as a vacation or birthday reward
- Cash obtained from a good friend protecting their portion of a restaurant invoice
- Cash obtained out of your roommate or associate for his or her share of the lease and utilities
Funds that will probably be reported on a 1099-Ok have to be flagged as funds for items or providers from the seller. When you choose “sending cash to household or associates,” it will not seem in your tax kind. In different phrases, that cash out of your roommate for her half of the restaurant invoice is protected.
Will you owe taxes on gadgets offered by means of Fb market?
Should you promote private gadgets for lower than you paid for them and acquire the cash through third-party cost apps, these adjustments will not have an effect on you. For instance, in case you purchase a sofa on your dwelling for $500 and later promote it on Fb Market for $200, you will not owe taxes on the sale as a result of it is a private merchandise you have offered at a loss. You could be required to point out documentation of the unique buy to show that you simply offered the merchandise at a loss.
When you have a aspect hustle the place you purchase gadgets and resell them for a revenue through PayPal or one other digital cost app, then earnings over $5,000 will probably be thought of taxable and reported to the IRS in 2024.
Be sure to maintain report of your purchases and on-line transactions to keep away from paying taxes on any nontaxable earnings — and when unsure, contact a tax skilled for assist.
The right way to put together for this reporting change
Any cost apps you utilize might ask you to substantiate your tax info, equivalent to your employer identification quantity, particular person tax identification quantity or Social Safety quantity. Should you personal a enterprise, you almost certainly have an EIN, however in case you’re a sole proprietor, particular person freelancer or gig employee, you may present an ITIN or SSN.
In some circumstances, receiving a 1099-Ok might take a few of the guide work out of submitting your self-employment taxes.
As soon as this rule takes impact, you should still obtain particular person 1099-NEC varieties in case you had been paid by means of direct deposit, examine or money. When you have a number of shoppers who pay you thru PayPal, Venmo, Upwork or different third-party cost apps and you earn greater than $5,000, you may obtain one 1099-Ok as a substitute of a number of 1099-NECs.
To keep away from any reporting confusion, be sure to’re monitoring your earnings manually or with accounting software program equivalent to Quickbooks.