The IRS is implementing new 1099-Ok reporting requirement this yr. Meaning anybody who receives $5,000 or extra in revenue by way of third-party fee apps reminiscent of PayPal, Venmo, Money App or Zelle in 2024 will obtain a 1099-Ok subsequent yr.
The IRS has delayed this new reporting rule for 2 years in a row. Why? Distinguishing between taxable and nontaxable transactions by third-party apps is not all the time simple. For instance, cash your roommate sends you thru Venmo for dinner will not be taxable, however cash acquired for a graphic design challenge 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 turned more and more clear we want further time to successfully implement the brand new reporting necessities,” stated 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. In the event you earn any kind of self-employment revenue, here is what you must know.
What’s the IRS $600 fee rule?
Below new reporting necessities first introduced within the American Rescue Plan, third-party fee apps will finally be required to report earnings over $600 to the IRS.
To your 2024 taxes (which you will file in 2025), the IRS is planning a phased rollout, requiring fee apps to report freelancer and enterprise proprietor earnings over $5,000 as an alternative of $600. The hope is that elevating the brink will scale back the chance of inaccuracies whereas additionally giving the company and fee apps extra time to work towards the eventual $600 minimal.
Beforehand, third-party apps solely despatched 1099-Ks to customers who acquired $20,000 in business funds throughout greater than 200 transactions.
In the event you’re self-employed, it’s best to already be paying taxes in your complete revenue, even when you do not obtain a 1099 from all your earnings. This is not a brand new rule; it is a tax reporting change. The IRS will probably be switching the reporting requirement to fee apps so it may well preserve tabs on transactions that always go unreported.
What the IRS 1099-Ok change means on your 2023 tax return
The IRS paused this reporting requirement for 2023. This implies when you earn freelance revenue, you will report your earnings like typical if you file your taxes this yr. You simply will not obtain a 1099-Ok kind from third-party apps except you obtain over $20,000 in funds throughout over 200 transactions in 2023.
As a substitute, you might obtain 1099-NECs from any companies you’re employed with. Even when you do not obtain a tax kind from a shopper, you are still on the hook for reporting all your self-employment revenue.
What the IRS 1099-Ok rule means on your 2024 tax return
For tax yr 2024, you will obtain tax kind 1099-Ok when you earn greater than $5,000 from a contract shopper or facet hustle by third-party fee apps, affecting the taxes you will file in 2025. The IRS might resolve to once more delay this rule or alter the brink, so it is attainable this requirement may change.
What fee apps are included on this IRS rule?
All third-party fee apps the place freelancers and enterprise house owners obtain revenue are required to start reporting transactions involving you to the IRS in 2024. Some standard fee apps embody PayPal, Venmo, Zelle and Money App. Different platforms freelancers might use, reminiscent of Fivver or Upwork, are additionally on the hook to start reporting funds that freelancers obtain all year long.
In the event you earn revenue by fee apps, it is a good suggestion to arrange separate PayPal, Zelle, Money App or Venmo accounts on your skilled transactions. This might forestall nontaxable fees — cash despatched from household or buddies — from being included in your 1099-Ok in error.
Will the IRS tax cash despatched to household or buddies?
Rumors have circulated that the IRS was cracking down on cash despatched to household and buddies by third-party fee apps, however that is not true. Private transactions involving items, favors or reimbursements will not be thought of taxable. Some examples of nontaxable transactions embody:
- Cash acquired from a member of the family as a vacation or birthday reward
- Cash acquired from a buddy masking their portion of a restaurant invoice
- Cash acquired out of your roommate or associate for his or her share of the hire and utilities
Funds that will probably be reported on a 1099-Ok should be flagged as funds for items or providers from the seller. When you choose “sending cash to household or buddies,” 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 objects offered by Fb market?
In the event you promote private objects for lower than you paid for them and acquire the cash by way of third-party fee apps, these adjustments will not have an effect on you. For instance, when 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’ve got offered at a loss. You could be required to indicate documentation of the unique buy to show that you just offered the merchandise at a loss.
When you’ve got a facet hustle the place you purchase objects and resell them for a revenue by way of PayPal or one other digital fee app, then earnings over $5,000 will probably be thought of taxable and reported to the IRS in 2024.
Make sure that to maintain a very good document of your purchases and on-line transactions to keep away from paying taxes on any nontaxable revenue — and when doubtful, contact a tax skilled for assist.
Find out how to put together for this reporting change
Any fee apps you utilize might ask you to substantiate your tax info, reminiscent of your employer identification quantity, particular person tax identification quantity or Social Safety quantity. In the event you personal a enterprise, you almost certainly have an EIN, however when you’re a sole proprietor, particular person freelancer or gig employee, you will present an ITIN or SSN.
In some instances, receiving a 1099-Ok might take a number of the handbook work out of submitting your self-employment taxes.
As soon as this rule takes impact, you should still obtain particular person 1099-NEC types when you have been paid by direct deposit, test or money. When you’ve got a number of purchasers who pay you thru PayPal, Venmo, Upwork or different third-party fee apps and you earn greater than $5,000, you will obtain one 1099-Ok as an alternative of a number of 1099-NECs.
To keep away from any reporting confusion, be sure you’re monitoring your earnings manually or with accounting software program reminiscent of Quickbooks.