I’m interested to know whether you did any side hustle or a freelance job this year where you have received money via applications like PayPal, Venmo, Cash App or any other similar sanctions? If yes, new tax reporting rules may apply to you. Beginning in 2024, third-party payment if made would exceed $5,000 ‘of gross income’ while no taxes were deducted will have to issue 1099 k forms. This change in regulation on reporting requirements was supposed to take effect much earlier but has since been postponed twice and now 2024 is the year set for payment systems to start following the regulations set forth by the Internal Revenue Service. In this section, we shall explain why you need to be prepared for this change.
Understanding form 1099-K
Tax form 1099-K is intended to report any income that one earns through a third party payment processor with regards to non-employee activities such as freelancing, gig economy jobs and contract work that is not subject to withholding taxes. While this new reporting threshold for 1099-K shall commence at 5,000 us dollars for the financial year 2024, the revenue department has plans of eventually reducing it to $ 600 dollars, the original amount that was put out when announcing the change. For now, looking at the $5,000 threshold allows for the IRS and the payment apps due time to adapt to the changes thus reducing the chances of mistakes and the difficulties involved in the transition.
Reason for delay in 1099-K reporting rules
The IRS has contemplated introducing the $600 tax rule for reporting purposes in 2022. But this raised issues of distinguishing taxable payments from non-taxable ones. For example, while sharing food costs or renting a house with friends and family is not considered taxable income, payments for freelance work are. This made it problematic for both the taxpayers and the payment platforms, forcing the IRS to postpone the rollout on two occasions. As per IRS Commissioner Danny Werfel, wait, was the reassurance that the introduction of the reporting requirements would require more time.
Which payment apps are affected?
The newly released IRS guideline is inclusive of all other third party monetary wireless applications which allow people and companies to earn income that is not taxed. Such applications include the likes of PayPal, Venmo, Zelle and Cash App and even gig economies and recruiters like Fiverr and Upwork. They will also file returns for payments made above 5000 in 2024 and keep reporting to the IRS the payments made within that bracket.
To avoid any errors on your 1099-K, you should avoid mixing personal and business transactions in one account especially in PayPal and Venmo apps. This is important to ensure that personal payments that are not meant for tax reporting purposes do not get classified as business income that is taxable.
Will personal payments be taxed?
There’s been confusion about whether the IRS will tax personal payments sent through third-party apps. The answer is no. Personal transactions, such as splitting a dinner bill or receiving money for a holiday gift, are not taxable and should not appear on your 1099-K. The IRS focuses on payments flagged as “for goods or services” when determining taxable income. So, payments classified as “sending money to family or friends” won’t be included on your tax forms.
What about selling personal items?
Selling personal items like furniture, clothing, or electronics through platforms like Facebook Marketplace or eBay is usually non-taxable if sold at a loss. For instance, if you bought a couch for $500 and later sold it for $200, you won’t owe taxes because it’s considered a personal item sold at a loss. However, if you’re reselling items for profit — such as flipping goods — any income exceeding $5,000 will be subject to the new 1099-K reporting requirement. Keeping purchase records will help prove any items sold at a loss, in case the IRS questions the sale.
Preparing for the new reporting requirements
Being the case, third-party payment platforms may need to authenticate your taxpayer identification number for purposes of this rule and such number may be an Employer Identification Number (EIN), a Social Security Number (SSN), or an Individual Tax Identification Number (ITIN). As a business owner, provision of an EIN will be required, whereas freelancers or gig workers will provide their SSN or ITIN in most cases.
In the event that you practice a profession on your own, then this new reporting requirement may help you ease the process of filing self-employment tax returns. You can expect to also file a 1099-K rather than filing individual 1099-NEC forms from each client if all payments are made through a third party and are above $5000.
Tips for tax season
Given the IRS’s implementation of a new rule by which all payment platforms are expected to issue 1099-K forms to all businesses earning over $5,000 starting 2024, maintaining proper records and documentation is crucial. For instance, it would be advisable to invest in accounting tools like QuickBooks to help in monitoring gains and losses on an annual basis. That way, when it comes to tax time, you will be ready with all the earning and deductions filed and in order.
With this new 1099-K reporting regime, the IRS is attempting to bring within the reported incomes the incomes that would have been unduly reported particularly in the gig and freelance economy. The best way to describe this new type of tax is to say it is not a new kind of tax. It is rather a change in the laws governing information reporting within the taxation system. Should you be concerned as to how this may influence your filing, it would be wise to consult a tax specialist who will advise you on how best to prepare for your filing dates.
