The IRS’s 1099-Okay reporting change implementation has had a rocky launch, leaving freelancers with a number of questions.
Initially set to kick off originally of 2022, the IRS deliberate to implement a brand new reporting rule that might require third occasion cost apps, like PayPal, Venmo, Money App or Zelle, to report earnings incomes over $600 or extra per yr to the tax company.
In November final yr, the IRS introduced it will delay the rule for the second yr in a row. Why? Distinguishing between taxable and nontaxable transactions by third-party apps is not at all times simple. For instance, cash your roommate sends you thru Venmo for dinner just isn’t taxable, however cash acquired for a graphic design venture is. The pause provides cost platforms extra time to organize.
“We spent many months gathering suggestions from third-party teams and others, and it grew to become more and more clear we want further time to successfully implement the brand new reporting necessities,” mentioned IRS Commissioner Danny Werfel in a November 2023 assertion.
When will the brand new tax requirement roll out? And what must you count on when submitting your taxes when you earned cash by PayPal or one other cost platform in 2023? This is all the things you could know as we dive into tax season.
What is the IRS $600 cost rule?
Below new reporting necessities first introduced within the American Rescue Plan, third-party cost apps will finally be required to report earnings over $600 to the IRS.
To your 2024 taxes (which you will file in 2025), the IRS is planning a phased rollout, requiring cost apps to report freelancer and enterprise proprietor earnings over $5,000 as a substitute of $600. The hope is that elevating the brink will cut back the chance of inaccuracies whereas additionally giving the company and cost apps extra time to work towards the eventual $600 minimal.
Beforehand, third-party apps solely despatched 1099-Ks to customers who acquired $20,000 in business funds throughout greater than 200 transactions.
When you’re self-employed, you need to already be paying taxes in your complete earnings, even when you do not obtain a 1099 from your entire earnings. This is not a brand new rule; it is a tax reporting change. The IRS might be switching the reporting requirement to cost apps so it may well hold tabs on transactions that usually go unreported.
What the IRS 1099-Okay change means in your 2023 tax return
The IRS paused this reporting requirement for 2023. This implies when you earn freelance earnings, you will report your earnings like ordinary while you file your taxes this yr. You simply will not obtain a 1099-Okay kind from third-party apps until you obtain over $20,000 in funds throughout over 200 transactions in 2023.
As an alternative, chances are you’ll obtain 1099-NECs from any companies you’re employed with. Even when you do not obtain a tax kind from a shopper, you are still on the hook for reporting your entire self-employment earnings.
What the IRS 1099-Okay rule means in your 2024 tax return
For tax yr 2024, you will obtain tax kind 1099-Okay when you earn greater than $5,000 from a contract shopper or facet hustle by third-party cost apps, affecting the taxes you will file in 2025. The IRS might determine to once more delay this rule or alter the brink, so it is potential this requirement may change.
What cost apps are included on this IRS rule?
All third-party cost apps the place freelancers and enterprise homeowners obtain earnings are required to start reporting transactions involving you to the IRS in 2024. Some standard cost apps embody PayPal, Venmo, Zelle and Money App. Different platforms freelancers might use, comparable to Fivver or Upwork, are additionally on the hook to start reporting funds that freelancers obtain all year long.
When you earn earnings by cost apps, it is a good suggestion to arrange separate PayPal, Zelle, Money App or Venmo accounts in your skilled transactions. This might stop nontaxable prices — cash despatched from household or buddies — from being included in your 1099-Okay in error.
Will the IRS tax cash despatched to household or buddies?
Rumors have circulated that the IRS was cracking down on cash despatched to household and buddies by third-party cost apps, however that is not true. Private transactions involving items, favors or reimbursements will not be thought-about taxable. Some examples of nontaxable transactions embody:
- Cash acquired from a member of the family as a vacation or birthday reward
- Cash acquired from a pal overlaying their portion of a restaurant invoice
- Cash acquired out of your roommate or accomplice for his or her share of the lease and utilities
Funds that might be reported on a 1099-Okay have to be flagged as funds for items or providers from the seller. When you choose “sending cash to household or buddies,” 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.
Will you owe taxes on objects bought by Fb market?
When you promote private objects for lower than you paid for them and accumulate the cash by way of third-party cost apps, these modifications will not have an effect on you. For instance, when you purchase a sofa in your dwelling 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 have bought at a loss. Chances are you’ll be required to indicate documentation of the unique buy to show that you simply bought the merchandise at a loss.
You probably have a facet hustle the place you purchase objects and resell them for a revenue by way of PayPal or one other digital cost app, then earnings over $5,000 might be thought-about taxable and reported to the IRS in 2024.
Be certain to maintain a very good file 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.
How one can put together for this reporting change
Any cost apps you utilize might ask you to substantiate your tax data, comparable to your employer identification quantity, particular person tax identification quantity or Social Safety quantity. When you personal a enterprise, you probably have an EIN, however when you’re a sole proprietor, particular person freelancer or gig employee, you will present an ITIN or SSN.
In some circumstances, receiving a 1099-Okay might take a number of the guide work out of submitting your self-employment taxes.
As soon as this rule takes impact, you should still obtain particular person 1099-NEC types when you have been paid by direct deposit, examine or money. You probably have a number of shoppers who pay you thru PayPal, Venmo, Upwork or different third-party cost apps and you earn greater than $5,000, you will obtain one 1099-Okay as a substitute of a number of 1099-NECs.
To keep away from any reporting confusion, ensure you’re monitoring your earnings manually or with accounting software program comparable to Quickbooks.
