April 20, 2024

IRS Tax Delay: If You Use Venmo, PayPal, or Cash App, Here’s What You Need to Know

After two years of delays, the IRS plans to finally implement its new 1099-K reporting requirement for anyone who earns income through third-party payment apps like PayPal, Venmo, Cash App, or Zelle.

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Originally scheduled to go live in 2022, this change to IRS reporting would cause payment apps to report income over $600 to the tax agency. Previously, third-party apps only sent 1099-Ks to users who received $20,000 in merchant payments in more than 200 transactions.

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The tax agency delayed this new reporting rule to give payment apps more time to prepare for the change. Distinguishing between taxable and non-taxable transactions through third-party applications is not always easy. For example, the money your roommate sends you via Venmo for dinner is not taxable. The money received for the graphic design work you did is. The IRS halted implementation to prevent confusion and incorrect earnings reporting.

“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 a statement. November 2023.

Starting in 2024, the IRS is planning a phased rollout, requiring payment apps to report earnings for self-employed workers and business owners 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 work toward the eventual $600 minimum.

All of the pauses and changes to this reporting requirement have left many self-employed people confused about what to expect this tax season and beyond. If you earn income as a freelancer, here’s what you need to know.

What is the IRS $600 rule?

Under new IRS reporting requirements first announced in the American Rescue Plan, third-party payment apps will be required to report earnings over $600 to the IRS. By 2024, only income over $5,000 will be reported.

If you’re self-employed, you should already pay taxes on your entire income, even if you don’t receive a 1099 for all of your earnings. This is not a new rule; it’s a tax inform change. The IRS will change the reporting requirement to payment applications so the tax agency can monitor transactions that often go unreported.

How does the IRS 1099-K change affect my 2023 tax return?

It is not like this. The IRS has suspended this reporting requirement for 2023. If you earn income as a self-employed person, you still need to report your earnings for the 2023 tax year when you file your taxes this year. You will not receive a Form 1099-K from third-party applications unless you receive more than $20,000 in payments in more than 200 transactions in 2023.

Instead, you can receive 1099-NEC from any company you work with. Even if you don’t receive a tax form from a client, you are still required to report all of your self-employment income.

What does IRS Rule 1099-k mean for my 2024 return?

Starting now, for tax year 2024, if you earn more than $5,000 from a freelance client or work through third-party payment apps, you will receive tax form 1099-K for your earnings for the taxes you file. 2025.

The IRS may decide to delay this rule again or change the threshold, so this requirement may change throughout the year.

What paid apps are included in this rule?

All third-party payment apps where freelancers and business owners receive income must begin reporting transactions involving you to the IRS in 2024. Some popular payment apps include PayPal, Venmo, Zelle, and Cash App. freelancers can use, such as Fivver or Upwork, they are also interested in starting to report the payments that freelancers receive throughout the year.

If you earn income through payment apps, it’s a good idea to set up separate PayPal, Zelle, Cash App, or Venmo accounts for your professional transactions. This could prevent non-taxable charges (money sent from family or friends) from being mistakenly included in your 1099-K.

Does the IRS tax money you send to family or friends?

Rumors have circulated that the IRS was 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. Some examples of non-taxable transactions include:

  • Money received from a family member as a holiday or birthday gift.
  • Money received from a friend to cover his or her share of a restaurant bill.
  • Money received from your roommate or partner for your share of rent and utilities

Payments to be reported on a 1099-K should be marked 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, that money from your roommate for half the restaurant bill is safe.

Will I owe taxes on items sold through Facebook Marketplace?

If you sell personal items for less than you paid for them and collect the money through third-party payment apps, this new legislation will not affect you. For example, if you buy a couch for your home for $500 and then sell it on Facebook Marketplace for $200, you won’t owe sales tax 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 business where you purchase items and resell them for a profit through PayPal or another digital payment app, profits over $5,000 will be considered taxable and reported to the IRS in 2024.

Be sure to keep good records 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.

How to prepare for this reporting change

Any payment application you use may ask you to confirm your tax information, such as your employer identification number, individual tax identification number, or Social Security number. If you are a business owner, you most likely have an EIN, but if you are a sole proprietor, freelancer, or freelancer, you will need to provide an ITIN or SSN.

In some cases, receiving a 1099-K can eliminate 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 through PayPal, Venmo, Upwork, or other third-party payment apps and 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 earnings manually or with accounting software like Quickbooks.

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