After two years of delays, the IRS plans to lastly implement its new 1099-Okay reporting requirement for anybody incomes earnings by way of third-party cost apps like PayPal, Venmo, Money App or Zelle.
Initially slated to go dwell in 2022, this IRS reporting change would 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.
The tax company delayed this new reporting rule to offer cost apps extra time to arrange for the change. Distinguishing between taxable and nontaxable transactions by third-party apps is not at all times simple. For instance, cash your roommate sends you thru Venmo for dinner isn’t 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 Nov. 2023 assertion.
Beginning in 2024, the IRS is planning a phased rollout, requiring cost 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 cost apps extra time to work towards the eventual $600 minimal.
The entire pauses and modifications to this reporting requirement have left many freelancers confused over what to anticipate for this tax season and past. For those who earn self-employment earnings, here is what it’s essential know.
What’s the IRS $600 rule?
Beneath the brand new IRS 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.
For those who’re self-employed, it’s best to already be paying taxes in your whole earnings, even if you happen to 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 the tax company can hold tabs on transactions that usually go unreported.
How does the IRS 1099-Okay change influence my 2023 tax return?
It would not. The IRS paused this reporting requirement for 2023. For those who earn freelance earnings, you are still required to report your earnings for the 2023 tax yr once you file your taxes this yr. You will not obtain a 1099-Okay type from third-party apps except you obtain over $20,000 in funds throughout over 200 transactions in 2023.
As an alternative, you could obtain 1099-NECs from any companies you’re employed with. Even if you happen to do not obtain a tax type from a consumer, you are still on the hook for reporting your whole self-employment earnings.
What does the IRS 1099-k rule imply for my 2024 return?
As of proper now, for tax yr 2024, if you happen to earn greater than $5,000 from a contract consumer or aspect hustle by third-party cost apps, you may obtain tax type 1099-Okay to your earnings for the taxes you may file in 2025.
The IRS might resolve to delay this rule once more or change the brink, so this requirement might change all year long.
What cost apps are included on this rule?
All third-party cost apps the place freelancers and enterprise homeowners obtain earnings are required to start reporting transactions involving you to the IRS in 2024. Some in style cost apps embody PayPal, Venmo, Zelle and Money App. Different platforms freelancers might use, similar to Fivver or Upwork, are additionally on the hook to start reporting funds freelancers obtain all year long.
For those who earn earnings by cost apps, it is a good suggestion to arrange separate PayPal, Zelle, Money App or Venmo accounts to your skilled transactions. This might forestall nontaxable fees — cash despatched from household or mates — from being included in your 1099-Okay in error.
Is the IRS taxing cash you ship to household or mates?
Rumors have circulated that the IRS was cracking down on cash despatched to household and mates by third-party cost apps, however that is not true. Private transactions involving items, favors or reimbursements usually are not thought-about taxable. Some examples of nontaxable transactions embody:
- Cash obtained from a member of the family as a vacation or birthday reward
- Cash obtained from a pal overlaying their portion of a restaurant invoice
- Cash obtained out of your roommate or accomplice for his or her share of the lease and utilities
Funds that will probably be reported on a 1099-Okay should be flagged as funds for items or providers from the seller. When you choose “sending cash to household or mates,” it will not seem in your tax type. In different phrases, that cash out of your roommate for her half of the restaurant invoice is protected.
Will I owe taxes on gadgets offered by Fb market?
For those who promote private gadgets for lower than you paid for them and acquire the cash by way of third-party cost apps, this new laws will not have an effect on you. For instance, if you happen to purchase a sofa to your residence 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.
You probably have a aspect hustle the place you purchase gadgets and resell them for a revenue by way of PayPal or one other digital cost app, then earnings over $5,000 will probably be thought-about taxable and reported to the IRS in 2024.
Ensure to maintain a great report of your purchases and on-line transactions to keep away from paying taxes on any nontaxable earnings — and when doubtful, contact a tax skilled for assist.
Learn how to put together for this reporting change
Any cost apps you utilize might ask you to substantiate your tax info, similar to your employer identification quantity, particular person tax identification quantity or Social Safety quantity. For those who personal a enterprise, you probably have an EIN, however if you happen to’re a sole proprietor, particular person freelancer or gig employee, you may present an ITIN or SSN.
In some circumstances, receiving a 1099-Okay 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 if you happen to have been paid by direct deposit, examine or money. You probably have a number of purchasers who pay you thru PayPal, Venmo, Upwork or a number of different third-party cost apps and earn greater than $5,000, you may obtain one 1099-Okay as an alternative of a number of 1099-NECs.
To keep away from any reporting confusion, be sure to’re preserving monitor of your earnings manually or with accounting software program like Quickbooks.
