Freelancers, scammers and contractors who were paid through services like PayPalVenmo or Cash App this year may receive a different tax form in January.
The IRS confirmed in a Press release of November 26 that third-party payment applications will have to send to you and the IRS tax form 1099-K if you earned more than $5,000 in untaxed income this year i were paid through the payment application. You’ll then use the 1099-K to report your income when you do file your tax return in 2025.
This new tax reporting rule was first announced in 2021 to capture income over $600 that was paid through third-party payment apps. It was supposed to be operational in 2022, but was delayed two years in a row. In 2023, the IRS announced that 2024 would be a transition tax year, to give payment applications more time to prepare for the change. Instead of the $600 minimum, only individuals who earned more than $5,000 in income through third-party applications will receive a 1099-K.
The tax agency announced that 2025 would be another transition year, with the minimum dropping to $2,500 next year, then to $600 in 2026. In previous years, the minimum was much higher.
“Prior to 2024, the earnings threshold was $20,000 and 200 transactions to receive a 1099-K tax document,” said Mark Steber, chief tax information officer at Jackson Hewitt.
if you earn self-employed or self-employed incomeyou should already be paying taxes on your total earnings, even if you don’t receive a Form 1099. This is not a new tax requirement; it’s a tax reports change The IRS will change the reporting requirement to payment apps so it can monitor transactions that often go unreported. If you’ve made money with third-party payment apps this year, here’s what you need to know.
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What is a 1099-K?
A 1099-K is a tax form that reports income received through a third-party payment platform from non-permanent work, such as a side hustle, freelance arrangement, or contractor position where no taxes are withheld.
The IRS currently requires either third-party payment applications like Cash App and Venmo to send a 1099-K to the IRS and to individuals if they earned more than $20,000 in business payments in more than 200 transactions. If you regularly earn more than $20,000 in freelance income, get paid through Venmo, and receive more than 200 payment transactions, you may have received a 1099-K tax form before.
What is the new IRS 1099-K reporting rule?
Under the new reporting requirements first announced in the American Rescue Plan, third-party payment apps will have to report earnings above $600 to the IRS.
For your 2024 taxes (which you’ll file in 2025), the IRS is planning a phased rollout, requiring payment apps to report self-employed and business owners. earnings over $5,000 instead of $600. The hope is that raising the threshold will reduce the risk of errors while giving the agency and payment applications more time to work toward the eventual minimum of $600.
“The tax requirements and tax treatment for taxpayers have not changed,” Steber said. “This taxable income has always been considered taxable by the IRS and must be reported on a tax return. The new change requires online platforms to provide 1099-Ks to both their users and the IRS at a lower threshold than in previous years.”
Why was the 1099-K delayed?
Originally scheduled to begin in early 2022, the IRS planned to implement a new reporting rule that would require third-party payment applications such as PayPalVenmo or Cash App to report income of $600+ per year or more to the tax agency. The IRS has delayed this new reporting requirement to 2022 and again to 2023.
Why? It is not always easy to distinguish between taxable and non-taxable transactions using third-party applications. For example, money your roommate sends you via Venmo for dinner isn’t taxable, but money received for a graphic design project might be. The delayed launch gave payment platforms more time to prepare.
“We spent many months gathering feedback from third-party groups and others, and it became increasingly clear that we need additional time to effectively implement the new reporting requirements,” said IRS Commissioner Danny Werfel in one Release of November 2023.
Which payment applications are covered by this IRS rule?
All from third parties paid applications where freelancers and business owners receive income must begin reporting transactions involving you to the IRS by 2024. Some popular payment apps include PayPal, Venmo, and Cash App. Other platforms that freelancers can use, such as Fivver or Upwork, are also waiting to start reporting payments that freelancers receive throughout the year.
If you earn through payment apps, it’s a good idea to set up separate PayPal, Cash App, or Venmo accounts for your business transactions. This could prevent non-taxable charges (money sent by family or friends) from being included on your 1099-K by mistake.
Zelle users will not receive a 1099-K
There is a popular payment application that is exempt from the 1099-K rule. Payment transfer service Zelle will not issue 1099-Kregardless of whether you receive business funds through the service or not. That’s because Zelle doesn’t hold your funds in an account like PayPal, Venmo, or Cash App do, but instead is used as a way to transfer money between bank accounts. If you are paid for your freelance or small business services through Zelle, it is your responsibility to report all income on Schedule C of your tax return.
Does the IRS levy money on family or friends?
no Rumors have circulated that the IRS was cracking down on money sent to family and friends using third-party payment apps, but that’s not true. Personal transactions involving gifts, favors or reimbursements are not considered taxable. Examples of non-taxable transactions include:
- Money received from a family member as a holiday or birthday gift
- Money received from a friend covering his share of a restaurant bill
- Money received from your roommate or partner for their share of rent and utilities
Payments to be reported on a 1099-K should be marked as payments for goods or services from the vendor. When you select “Sending money to family or friends,” it won’t appear on your tax form. In other words, your roommate’s money for her half of the restaurant bill is safe.
“This is just for self-employment income,” Steber said. “You should not receive a 1099-K for personal transactions, but be aware that some platforms may accidentally include personal transactions on the 1099-K and this will need to be corrected on users’ tax returns.”
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Do you owe tax on items sold on Facebook Marketplace?
If you sell personal items for less than you paid for them and collect the money through third-party payment apps, these changes won’t affect you. For example, if you buy a couch for your home for $500 and then sell it on Facebook Marketplace for $200, you don’t have to pay sales tax because it’s a personal item that you sold at a loss. You may be asked to show documentation of the original purchase to prove that you sold the item at a loss.
If you have a side hustle where you buy items and resell them for profit through PayPal or another digital payment appthen earnings above $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 tax 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’re a business owner, you’ll likely have an EIN, but if you’re a sole proprietor, self-employed, or gig worker, you’ll provide an ITIN or SSN.
In some cases, receiving a 1099-K can take some of the manual work out of filing your self-employment taxes.
After this rule goes into effect, you can still receive individual 1099-NEC forms if you were paid by direct deposit, check, or cash. If you have multiple clients who pay you through PayPal, Venmo, Upwork, or other third-party payment apps i you earn more than $5,000, you’ll get one 1099-K instead of multiple 1099-NECs.
To avoid any reporting confusion, make sure you track your earnings manually or with accounting software like Quickbooks.
