The New IRS 1099-K Tax Rule: Here’s What Freelancers Who Make Money With PayPal or the Cash App Should Know

After two consecutive delays, the IRS is moving forward with a new tax reporting rule for freelancers who are paid through third-party software. If you made $5,000 or more PayPalVenmo, Cash App or similar platforms, the IRS will require these companies to provide tax form 1099-K explaining what you get.

These are not new tax requirements; and tax to announce change. If you self-employment or self-employment incomeyou should already be paying taxes on all of your income, even if you don’t receive a 1099 form. The IRS is changing the reporting requirement to payment programs to monitor transactions that often go unreported.

“The tax and tax needs of taxpayers have not changed,” said Mark Steber, director of tax information at Jackson Hewitt. “These taxable incomes are always considered by the IRS to be taxable and must be reported on the tax return. The new change requires online platforms to issue 1099-Ks to all users and the IRS at a lower rate than in previous years. .”

The IRS will only need third-party programs to report your income — the IRS doesn’t want money you’ve sent to family or friends to pay the rent or split the dinner bill.

If you received $5,000 or more through third-party programs this year, you must receive a 1099-K to report your earnings when you pay them. file your taxes in 2025. Here’s everything you need to know about the reporting changes.

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What is a 1099-K?

A A 1099-K is a tax form which describes income received through a third-party payment method from non-regular work, such as side hustles, independent contracting or contractor roles where taxes are not deducted.

The IRS currently wants everything third-party payment software like Cash App and Venmo to send a 1099-K to the IRS and individuals if they make more than $20,000 in sales payments over 200. If you make more than $20,000 regularly, get paid through Venmo, and receive more than 200 payments, you may have already received a 1099- K.

What is the new IRS 1099-K rule?

Under the new reporting requirements first announced in the American Rescue Plan, third-party payment programs will eventually be required to report earnings of more than $600 to the IRS.

“Prior to 2024, their income was $20,000 and $200 to receive a 1099-K tax return,” Steber said.

For your 2024 tax return (which you’ll file in 2025), the IRS plans to gradually roll out, requiring payment software to provide independent reporting for both freelancers and business owners. earn more than $5,000 instead of $600. The hope is that raising the limit will reduce the risk of errors and also give the agency and payment programs more time to work on the $600 minimum.

Why was the third-party software tax law delayed?

Originally set to begin in early 2022, the IRS planned to implement a new reporting rule that would require programs to pay third parties, such as. PayPalVenmo or Cash App to report payments of $600 or more per year to the tax agency. The IRS delayed this new announcement in 2022 and again in 2023.

Why? Distinguishing between taxes and unpaid taxes through other programs is not always easy. For example, the money your friend sends you via Venmo for dinner is not taxable, but the money received from creating art may be. The delayed release gave paid platforms more time to prepare.

“We spent months gathering feedback from the public, and it became clear that we needed more time to meet the reporting requirements,” IRS Commissioner Danny Werfel said in a statement. Notice for November 2023.

Which payroll programs require sending 1099-Ks?

All third parties paid programs where freelancers and business owners receive income are required to start reporting to the IRS in 2024. Other popular payment apps include PayPal, Venmo and Cash App. Other platforms freelancers can use, such as Fivver or Upwork, are also on the verge of starting to provide reports that volunteers receive throughout the year.

If you earn money through payment apps, it’s a good idea to set up PayPal, Cash App or Venmo accounts for your professional activities. This can prevent untaxed payments — money sent from family or friends — from being erroneously included on your 1099-K.

Zelle users will not receive a 1099-K

There is one popular payroll program that does not require a 1099-K. Fee based on service Zelle does not issue 1099-Ksregardless of whether you receive business income through this service or not. That’s because Zelle doesn’t store your money in an account, like PayPal, Venmo or the Cash App, and instead is used as a way to send money between banks. If you are paid for your freelance or small business through Zelle, it is your responsibility to report all of the income on Schedule C of your tax return.

Are the IRS tax bills you send to family or friends?

No. Rumors have spread that the IRS was cracking down on money sent to family and friends through third-party payment programs, but that’s not true. Personal transactions involving gifts, favors or returns are not considered taxable. Some examples of tax-free transactions include:

• Money received from a relative as a holiday or birthday gift
• Money received from a friend who pays their share of the restaurant bill
• Money received from a friend or partner for their share of rent and utilities

Payments that will be reported on the 1099-K must be recorded as payments for goods or services from suppliers. If you choose to “send money to family or friends,” it won’t show up on your tax form. In other words, the money from your roommate for half of the restaurant is safe.

“This is a self-funding project,” Steber said. “You should not receive a 1099-K for your transactions but be aware that some platforms may accidentally include your transactions in the 1099-K and should be corrected on the user’s tax return.”

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Do you have to pay taxes when you sell on Facebook Market or Poshmark?

If you sell your products for less than what you paid for and collect the money through other payment programs, this change does not affect you. For example, if you buy a sofa for your home for $500 and sell it on Facebook Marketplace for $200, you won’t owe any sales tax because it’s your lost item. You may need to show documentation of the original purchase to prove that you accidentally sold the item.

If you have a side problem where you buy products and resell them for a profit through PayPal or another digital payment programthen earnings over $5,000 will be considered taxable and reported to the IRS in 2024.

Be sure to keep good records of your purchases and online transactions so you don’t pay taxes on any untaxed money — and when in doubt, consult a tax professional.

What do you need to do to prepare for this report change?

Any payment software you use may ask you to confirm tax information, such as your employer’s identification number, your tax ID number or your Social Security number. If you have a business, you probably have an EIN, but if you are a sole proprietor, self-employed or a gig worker, you will provide an ITIN or SSN.

Sometimes, receive a 1099-K they can take on some of the manual labor of filing self-employment taxes.

After the rule goes into effect, you can still receive 1099-NEC forms if you were paid by deposit, check or cash. If you have multiple clients who pay you through PayPal, Venmo, Upwork or other payment apps and you earn more than $5,000, you will receive one 1099-K instead of multiple 1099-NECs.

To avoid any reporting confusion, be sure to track your income manually or with an accounting software such as Quickbooks.

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