After two years of delays, the IRS plans to lastly implement its new 1099-Okay reporting requirement for anybody incomes revenue through third-party fee apps like PayPal, Venmo, Money App or Zelle.
Initially slated to go reside in 2022, this IRS reporting change would have fee apps report revenue over $600 to the tax company. Beforehand, third-party apps solely despatched 1099-Ks to customers who acquired $20,000 in industrial funds throughout greater than 200 transactions.
The tax company delayed this new reporting rule to present fee apps extra time to organize for the change. Distinguishing between taxable and nontaxable transactions by way of third-party apps is not all the time simple. For instance, cash your roommate sends you thru Venmo for dinner shouldn’t be taxable. Cash acquired 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 turned more and more clear we want further 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 fee apps to report freelancer and enterprise proprietor earnings over $5,000 as a substitute 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.
The entire pauses and modifications to this reporting requirement have left many freelancers confused over what to anticipate for this tax season and past. When you earn self-employment revenue, this is what you should know.
What’s the IRS $600 rule?
Underneath the brand new IRS reporting necessities first introduced within the American Rescue Plan, third-party fee apps might be required to report earnings over $600 to the IRS. For 2024, solely revenue over $5,000 might be reported.
When you’re self-employed, it’s best to already be paying taxes in your whole revenue, even in the event 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 might be switching the reporting requirement to fee 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. When you earn freelance revenue, you are still required to report your earnings for the 2023 tax 12 months while you file your taxes this 12 months. 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 a substitute, chances are you’ll obtain 1099-NECs from any companies you’re employed with. Even in the event you do not obtain a tax type from a consumer, you are still on the hook for reporting your whole self-employment revenue.
What does the IRS 1099-k rule imply for my 2024 return?
As of proper now, for tax 12 months 2024, in the event you earn greater than $5,000 from a contract consumer or aspect hustle by way of third-party fee apps, you will obtain tax type 1099-Okay on your earnings for the taxes you will file in 2025.
The IRS could determine to delay this rule once more or change the brink, so this requirement could change all year long.
What fee apps are included on this 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 embrace PayPal, Venmo, Zelle and Money App. Different platforms freelancers could use, reminiscent of Fivver or Upwork, are additionally on the hook to start reporting funds freelancers obtain all year long.
When you earn revenue by way of 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 costs — cash despatched from household or associates — from being included in your 1099-Okay in error.
Is the IRS taxing cash you ship to household or associates?
Rumors have circulated that the IRS was cracking down on cash despatched to household and associates by way of third-party fee 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 acquired from a member of the family as a vacation or birthday giftMoney acquired from a good friend protecting their portion of a restaurant billMoney acquired out of your roommate or associate for his or her share of the lease and utilities
Funds that might be reported on a 1099-Okay should be flagged as funds for items or companies from the seller. When you choose “sending cash to household or associates,” 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 secure.
Will I owe taxes on gadgets offered by way of Fb market?
When you promote private gadgets for lower than you paid for them and acquire the cash through third-party fee apps, this new laws will not have an effect on you. For instance, in the event you purchase a sofa on your house 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 might be required to indicate documentation of the unique buy to show that you just 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 fee app, then earnings over $5,000 might be thought of taxable and reported to the IRS in 2024.
Be certain to maintain an excellent file 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.
Methods to put together for this reporting change
Any fee apps you employ could ask you to substantiate your tax info, reminiscent of your employer identification quantity, particular person tax identification quantity or Social Safety quantity. When you personal a enterprise, you almost certainly have an EIN, however in the event you’re a sole proprietor, particular person freelancer or gig employee, you will present an ITIN or SSN.
In some circumstances, receiving a 1099-Okay could take a few 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 kinds in the event you have been paid by way of direct deposit, test or money. When you have a number of shoppers who pay you thru PayPal, Venmo, Upwork or a number of different third-party fee apps and earn greater than $5,000, you will obtain one 1099-Okay as a substitute of a number of 1099-NECs.
To keep away from any reporting confusion, ensure you’re protecting observe of your earnings manually or with accounting software program like Quickbooks.