IRS 1099-K Delay Update: The IRS does not expect freelancers to receive 1099-Ks this tax season. However, you must report any self-employment income to them. The IRS has chosen to delay implementing the new tax reporting requirement for the 1099-K, which may disappoint those who have been waiting to file during tax season.
In 2022, the IRS plans to introduce a new rule requiring third-party payment apps to report income over $600, including PayPal, Venmo, Cash App, and Zelle.
For the second year in a row, the IRS announced that it would delay the rule in November last year. The reason is that it is not always easy to distinguish between taxable and nontaxable transactions through third-party apps. For example, money received for a graphic design project is not taxable, while money sent to you from your roommate through Venmo is taxable. Payment platforms will have more time to prepare for the new rule.
According to IRS Commissioner Danny Werfel, “We spent many months collecting feedback from third-party groups and others, and it became increasingly clear we need additional time to implement the new reporting requirements effectively.”
What is the expected implementation date of the new tax requirement? As we prepare for tax season, here is everything you need to know.
How soon will the IRS begin processing tax returns with Child Tax Credits?
What is the IRS’s $600 payment rule?
The IRS will eventually require third-party payment apps to report earnings over $600 under new reporting requirements first announced in the American Rescue Plan.
As a result of raising the threshold, the agency and payment apps will have more time to work towards the minimum of $600 on 2024 taxes.
Before this, third-party apps sent 1099-Ks only to users who received commercial payments above $20,000 across more than 200 transactions.
Despite not receiving a 1099 for all of your earnings, self-employed individuals must pay taxes on their total income. By changing the reporting requirements for payment apps, the IRS can keep track of transactions that often go unreported. This is not a new rule; it is a change in tax reporting requirements.
The changes to IRS Form 1099-K for 2023
Freelancers earning over $20,000 across 200 transactions will not receive a 1099-K in 2023 because of this pause.
Regardless of whether you receive 1099-NECs from your employers, self-employment income must still be reported.
Your 2024 tax return and the IRS 1099-K rule
Your tax return for the following year will be affected if you earn more than $5,000 as a freelancer or side hustle through third-party payment apps during the tax year 2024. If the IRS decides to delay this rule again or adjust the threshold, this requirement may change.
How does this IRS rule affect payment apps?
In 2024, all third-party payment apps where freelancers and business owners receive income will be required to report transactions involving them to the IRS. Among the most popular payment apps are PayPal, Venmo, Zelle, and Cash App. Additionally, freelancers may have to report their earnings on other platforms, such as Fivver and Upwork.
If you earn income through a payment app, you should set up separate accounts for your professional transactions across PayPal, Zelle, Cash App, or Venmo. You should exclude any nontaxable charges, such as funds sent from friends and family, from your 1099-K form.
Is the IRS going to tax money sent to family or friends?
Money sent to family and friends via third-party payment apps has been rumored to be taxable; however, that is not true. Personal transactions involving gifts, favors, or reimbursements are not taxable. Among the nontaxable transactions are:
- As a gift for a holiday or birthday, money received from a family member
- An amount received from a friend covering their portion of the restaurant bill
- Rent and utility payments received from your roommate or partner
You will not receive a tax form if you choose “sending money to family or friends.”. The money your roommate gave her for her half of the restaurant bill is safe.
Do you expect to owe taxes on items sold through the Facebook marketplace?
Use a third-party payment app to avoid taxes on a couch you bought for $500 and sold for $200 on Facebook Marketplace. You may need to provide documentation of the original purchase to prove that you sold the item at a loss.
PayPal and other digital payment apps will require individuals who resell items for a profit to pay taxes.
To avoid paying taxes on any nontaxable income, keep a record of all purchases and online transactions. If you are in doubt, consult a tax professional.
Preparing for the change in reporting
Payment apps may require tax information, like employer ID, individual ID, or SSN. In business, you need an EIN, but in freelance or gig work, you need an ITIN or Social Security number.
Your self-employment taxes may be easier to file if you receive a 1099-K.
After this rule went into effect, individuals are still required to use individual 1099-NECs for direct payments by check, cash, or direct. A 1099-K will replace multiple 1099-NECs when you earn over $5,000 using PayPal, Venmo, Upwork, or another third-party payment app.
Track your earnings manually or with accounting software, such as Quickbooks, to avoid reporting confusion.
