If you’re a freelancer, business owner or someone who occasionally makes money on the side, you need to know about the new tax reporting requirement for PayPal, Venmo, Cash App and other third-party payment users.
Third party payment apps are required to send you a 1099-K tax form if you made more than $5,000 on the platform in 2024. This reporting change will give the IRS a clearer picture of how much you earned in untaxed income this year to help ensure you pay your taxes properly. For the 2025 tax year, the threshold will drop to $2,500.
The IRS originally rolled out a plan to implement new reporting requirements for anyone earning over $600 via payment apps in 2023. After two years of delays, the tax agency has decided to implement a phased rollout, lifting the reporting threshold to $5,000 for the 2024 tax year.
If you earn freelance or self-employment income, you’re likely no stranger to 1099 tax forms. You’re required to report any net earnings over $400 to the IRS when you file your tax return, even if you don’t receive a 1099. The 1099-K tax change places a reporting requirement on payment apps so the IRS can keep better tabs on income earnings that might otherwise go unreported.
“The taxation and tax treatment requirements for taxpayers have not changed,” said Mark Steber, chief tax information officer for Jackson Hewitt. “This income has always been considered by the IRS to be taxable and should be reported on a tax return.”
The new 1099-K tax reporting rule only applies to income you earned from third-party payment apps. The IRS is not taxing the money you send to your friends or family.
Here’s everything you should know about the new 1099-K tax reporting change.
Read more: Updated IRS Federal Tax Brackets Could Boost Your Paycheck Next Year. Here’s Why
What is a 1099-K?
A 1099-K is a tax form that reports income received via a third-party payment platform from a non-permanent job, such as a side hustle, freelance agreement or contractor position where taxes are not withheld.
The IRS currently requires any third-party payment apps like Cash App and Venmo to send a 1099-K to the IRS and individuals if they earned more than $20,000 in commercial payments across more than 200 transactions. If you regularly make over $20,000 in freelance income, are paid through Venmo, and receive more than 200 transactions in payments, you may have received a 1099-K tax form before.
What’s the 1099-K rule for tax year 2024?
For your 2024 taxes (which you’ll file in 2025), the IRS is planning a phased rollout, requiring payment apps to report freelancer and business owner earnings over $5,000. “Prior to 2024, the earnings threshold was $20,000 and 200 transactions to receive a 1099-K tax document,” Steber said.
Why was the IRS’s 1099-K tax rule delayed?
Originally set to kick off at the beginning of 2022, the IRS planned to implement a new reporting rule that would require third-party payment apps, like PayPal, Venmo or Cash App to report income of over $600 or more per year to the tax agency. The IRS delayed this new reporting requirement in 2022 and again in 2023.
Why? Distinguishing between taxable and nontaxable transactions through third-party apps isn’t always easy. For example, money your roommate sends you through Venmo for dinner is not taxable, but money received for a graphic design project might be. The delayed rollout gave payment platforms more time to prepare.
“We spent many months gathering feedback from third-party groups and others, and it became increasingly clear we need additional time to effectively implement the new reporting requirements,” IRS Commissioner Danny Werfel said in a November 2023 statement.
Which payment apps will send 1099-Ks?
All third-party payment apps where freelancers and business owners receive income are required to begin reporting transactions involving you to the IRS in 2024. Some popular payment apps include PayPal, Venmo and Cash App. Other platforms freelancers may use, such as Fivver or Upwork, are also on the hook to begin reporting payments that freelancers receive throughout the year.
If you earn income through payment apps, it’s a good idea to set up separate PayPal, Cash App or Venmo accounts for your professional transactions. This could prevent nontaxable charges — money sent from family or friends — from being included on your 1099-K in error.
There’s one popular payment app that’s exempt from the 1099-K rule. Payment transfer service Zelle will not be issuing 1099-Ks, regardless 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, and 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’s your responsibility to report all income on Schedule C of your tax return.
How do you file a 1099-K?
You’ll include the income you earned that’s listed on your 1099-K by filing a Schedule C (an IRS form that reports profits or losses from your business). If you file using online tax software, it will guide you through reporting your income.
Be careful that you don’t double-report your income. For example, if you earned $10,000 in freelance income from a client, you’ll likely receive a 1099-NEC tax form for nonemployee compensation that details your earnings. If the client paid you via PayPal, you’ll also receive a 1099-K from the payment app for those same earnings. You do not need to report your earnings twice.
If you often don’t receive tax forms from your clients, you can use the 1099-K in its place to make sure you’re reporting your full income. If you have income from multiple clients or worry that your 1099-K is incorrect, reach out to an accountant to review your tax return and income documents before you file.
Is the IRS taxing money you send to family or friends?
No. Rumors have circulated that the IRS was cracking down on money sent to family and friends through third-party payment apps, but that isn’t true. Personal transactions involving gifts, favors or reimbursements are not considered taxable. Some examples of nontaxable transactions include:
- Money received from a family member as a holiday or birthday gift
- Money received from a friend covering their portion of a restaurant bill
- Money received from your roommate or partner for their share of the rent and utilities
Payments that will be reported on a 1099-K must be flagged 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, that money from your roommate for her half of the restaurant bill is safe.
“This is only for self-employment income,” Steber said. “You should not receive a 1099-K for personal transactions but be aware that some platforms could accidentally include personal transactions in the 1099-K and that will need to be corrected on the users tax return.”
Read more: Election 2024: Where Each Presidential Candidate Stands on the Child Tax Credit
Does the rule apply to items sold on Facebook or Poshmark?
If you sell personal items for less than you paid for them and collect the money via third-party payment apps, these changes won’t affect you. For instance, if you buy a couch for your home for $500 and later sell it on Facebook Marketplace for $200, you won’t owe taxes on the sale because it’s a personal item you’ve sold at a loss. You may be required 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 a profit via PayPal or another digital payment app, then earnings over $5,000 will be considered taxable and reported to the IRS in 2024. Make sure to keep a good record of your purchases and online transactions to avoid paying taxes on any nontaxable income, and when in doubt contact a tax professional for help.
What if you receive a Form 1099-K in error?
Now that tax season is here, it’s possible you’ll receive a 1099-K for money that isn’t income. For example, if your roommate pays you $1,000 a month via Venmo for rent, it’s possible Venmo would send you a 1099-K for $12,000 in earnings. In this case, the IRS says you should contact the payment platform and notify them of the error using the phone number in the lower lefthand corner of the form.
You should then be issued a corrected 1099-K. If you don’t have a corrected 1099-K before the tax filing deadline, you can still file your tax return. The IRS says to follow these three steps:
- Report the amount listed on Schedule 1, Part 1, Line 8z: Other income. List this as “Form 1099-K received in error” and then add the total amount. For the example above it would be “$11,000.”
- Adjust the amount on Schedule 1, Part II, Line 24z: Other adjustments. List this as “Form 1099-K received in error” and list the amount.
- Keep a copy of your 1099-K for your records. Hold onto this in case the IRS has any questions.
Following the above process will cancel out the erroneous 1099-K. However, if the IRS thinks the income is legitimate, it may flag or audit your return. Be sure to reach out to a tax professional if you have any questions.
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