When you’re a freelancer, enterprise proprietor or somebody who sometimes makes cash on the facet, it is advisable know in regards to the new tax reporting requirement for PayPal, Venmo, Money App and different third-party fee customers.
Third celebration fee apps are required to ship you a 1099-K tax form when you made greater than $5,000 on the platform in 2024. This reporting change will give the IRS a clearer image of how a lot you earned in untaxed earnings this yr to assist make sure you pay your taxes correctly. For the 2025 tax yr, the edge will drop to $2,500.
The IRS initially rolled out a plan to implement new reporting necessities for anybody incomes over $600 by way of fee apps in 2023. After two years of delays, the tax company has determined to implement a phased rollout, lifting the reporting threshold to $5,000 for the 2024 tax yr.
When you earn freelance or self-employment income, you are doubtless no stranger to 1099 tax forms. You are required to report any net earnings over $400 to the IRS if you file your tax return, even when you do not obtain a 1099. The 1099-Ok tax change locations a reporting requirement on fee apps so the IRS can hold higher tabs on earnings earnings which may in any other case go unreported.
“The taxation and tax therapy necessities for taxpayers haven’t modified,” mentioned Mark Steber, chief tax info officer for Jackson Hewitt. “This earnings has at all times been thought of by the IRS to be taxable and must be reported on a tax return.”
The brand new 1099-Ok tax reporting rule solely applies to earnings you earned from third-party fee apps. The IRS is just not taxing the cash you ship to your folks or household.
This is every little thing you must know in regards to the new 1099-Ok tax reporting change.
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What’s a 1099-Ok?
A 1099-K is a tax form that stories earnings acquired by way of a third-party fee platform from a non-permanent job, similar to a facet hustle, freelance settlement or contractor place the place taxes aren’t withheld.
The IRS at present requires any third-party payment apps like Money App and Venmo to ship a 1099-Ok to the IRS and people in the event that they earned greater than $20,000 in business funds throughout greater than 200 transactions. When you often make over $20,000 in freelance earnings, are paid by means of Venmo, and obtain greater than 200 transactions in funds, you’ll have acquired a 1099-Ok tax kind earlier than.
What is the 1099-Ok rule for tax yr 2024?
On your 2024 taxes (which you will file in 2025), the IRS is planning a phased rollout, requiring fee apps to report freelancer and enterprise proprietor earnings over $5,000. “Previous to 2024, the earnings threshold was $20,000 and 200 transactions to obtain a 1099-Ok tax doc,” Steber mentioned.
Why was the IRS’s 1099-Ok tax rule delayed?
Initially set to kick off initially of 2022, the IRS deliberate to implement a brand new reporting rule that may require third-party fee apps, like PayPal, Venmo or Money App to report earnings of over $600 or extra per yr to the tax agency. The IRS delayed this new reporting requirement in 2022 and once more in 2023.
Why? Distinguishing between taxable and nontaxable transactions by means of third-party apps is not at all times simple. For instance, cash your roommate sends you thru Venmo for dinner is just not taxable, however cash acquired for a graphic design mission is perhaps. The delayed rollout gave fee platforms extra time to arrange.
“We spent many months gathering suggestions from third-party teams and others, and it turned more and more clear we’d like further time to successfully implement the brand new reporting necessities,” IRS Commissioner Danny Werfel mentioned in a November 2023 statement.
Which fee apps will ship 1099-Ks?
All third-party payment apps the place freelancers and enterprise homeowners obtain earnings are required to start reporting transactions involving you to the IRS in 2024. Some well-liked fee apps embrace PayPal, Venmo and Money App. Different platforms freelancers might use, similar to Fivver or Upwork, are additionally on the hook to start reporting funds that freelancers obtain all year long.
When you earn earnings by means of fee apps, it is a good suggestion to arrange separate PayPal, Money App or Venmo accounts on your skilled transactions. This might forestall nontaxable fees — cash despatched from household or associates — from being included in your 1099-Ok in error.
There’s one well-liked fee app that is exempt from the 1099-Ok rule. Fee switch service Zelle will not be issuing 1099-Ks, no matter whether or not you obtain enterprise funds by means of the service or not. That is as a result of Zelle does not maintain your funds in an account, like PayPal, Venmo or Money App do, and as a substitute is used as a strategy to switch cash between financial institution accounts. In case you are paid on your freelance or small enterprise companies by means of Zelle, it is your duty to report all earnings on Schedule C of your tax return.
How do you file a 1099-Ok?
You will embrace the earnings you earned that is listed in your 1099-Ok by submitting a Schedule C (an IRS kind that stories earnings or losses from your enterprise). When you file utilizing on-line tax software program, it would information you thru reporting your earnings.
Watch out that you do not double-report your earnings. For instance, when you earned $10,000 in freelance earnings from a shopper, you will doubtless obtain a 1099-NEC tax form for nonemployee compensation that particulars your earnings. If the shopper paid you by way of PayPal, you will additionally obtain a 1099-Ok from the fee app for those self same earnings. You do not want to report your earnings twice.
When you typically do not obtain tax types out of your shoppers, you should utilize the 1099-Ok instead to ensure you’re reporting your full earnings. When you’ve got earnings from a number of shoppers or fear that your 1099-Ok is wrong, attain out to an accountant to evaluation your tax return and earnings paperwork earlier than you file.
Is the IRS taxing cash you ship to household or associates?
No. Rumors have circulated that the IRS was cracking down on cash despatched to household and associates by means of third-party fee apps, however that is not true. Private transactions involving items, favors or reimbursements aren’t thought of taxable. Some examples of nontaxable transactions embrace:
- Cash acquired from a member of the family as a vacation or birthday reward
- Cash acquired from a pal masking their portion of a restaurant invoice
- Cash acquired out of your roommate or associate for his or her share of the hire and utilities
Funds that will probably be reported on a 1099-Ok have to 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 kind. In different phrases, that cash out of your roommate for her half of the restaurant invoice is protected.
“That is just for self-employment earnings,” Steber mentioned. “You shouldn’t obtain a 1099-Ok for private transactions however remember that some platforms may by chance embrace private transactions within the 1099-Ok and that may must be corrected on the customers tax return.”
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Does the rule apply to gadgets offered on Fb or Poshmark?
When you promote private gadgets for lower than you paid for them and gather the cash by way of third-party fee apps, these adjustments will not have an effect on you. As an illustration, when you purchase a sofa on 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’ve got offered at a loss. You could be required to indicate documentation of the unique buy to show that you just offered the merchandise at a loss.
When you’ve got a facet hustle the place you purchase gadgets and resell them for a revenue by way of PayPal or another digital payment app, then earnings over $5,000 will probably be thought of taxable and reported to the IRS in 2024. Ensure that to maintain a superb 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.
What when you obtain a Kind 1099-Ok in error?
Now that tax season is right here, it is potential you will obtain a 1099-Ok for cash that is not earnings. For instance, in case your roommate pays you $1,000 a month by way of Venmo for hire, it is potential Venmo would ship you a 1099-Ok for $12,000 in earnings. On this case, the IRS says you must contact the fee platform and notify them of the error utilizing the telephone quantity within the decrease lefthand nook of the shape.
It is best to then be issued a corrected 1099-Ok. If you do not have a corrected 1099-Ok earlier than the tax submitting deadline, you’ll be able to nonetheless file your tax return. The IRS says to follow these three steps:
- Report the quantity listed on Schedule 1, Half 1, Line 8z: Different earnings. Record this as “Kind 1099-Ok acquired in error” after which add the overall quantity. For the instance above it will be “$11,000.”
- Modify the quantity on Schedule 1, Half II, Line 24z: Different changes. Record this as “Kind 1099-Ok acquired in error” and listing the quantity.
- Make a copy of your 1099-Ok on your information. Maintain onto this in case the IRS has any questions.
Following the above course of will cancel out the inaccurate 1099-Ok. Nevertheless, if the IRS thinks the earnings is official, it might flag or audit your return. Make sure to attain out to a tax skilled if in case you have any questions.
