The Internal Revenue Service announced some changes in how the IRS will be reporting taxes concerning users of third-party, Web-based payment platforms such as Venmo, PayPal and Cash App.
Beginning with the 2024 tax year, individuals and businesses that receive more than $5,000 through these platforms for goods and services will get a Form 1099-K, which also will be reported to the IRS. This adjustment is part of a phased plan to bring in new requirements that will aid in the better attribution of various types of transactions to help in the proper reporting of income.
Background on Form 1099-K reporting
Form 1099-K is an information return that reports income received from third-party settlement payors. Previously, a 1099-K was issued when an individual’s aggregate payments exceeded $20,000 and had more than 200 transactions within the calendar year. The American Rescue Plan of 2021 initially proposed slashing that threshold to $600 without a minimum threshold of transactions with the aim of capturing more of the taxable income derived from digital transactions. However, the IRS decided to phase its implementation and put it first at $5,000 for the 2024 tax year and going low at $600 for successive years.
Timeline of implementation
- Tax year 2024: $5,000. What this means, quite simply, is that starting this coming year of 2024, any platform that issues payments above $5,000 in a single calendar year will provide their users with a form called a 1099-K form.
- 2025 and later tax years: Threshold to lower to $600, where the scope of the transactions reported will see exponential expansion.
Impact on freelancers and small business owners
Freelancers, gig workers, and small business owners who get any kind of compensation through a platform like Venmo or PayPal, heed the new requirement. If you had more than $5,000 from goods or services in 2024, you’ll be getting a Form 1099-K from your payment platform at the end of that year. A copy of the payment would be given to you and another one to the IRS showing the income that you derived from those transactions.
Note that this does not mean that if you are not getting a Form 1099-K then you should not report all your taxable income. There are fines imposed by the authority on any cases of non-compliance and hence the accuracy of your income reporting is key.
Personal transactions remain non-taxable
These reporting requirements are on payments received for goods and services. The IRS states that this rule does not include personal transactions which may be reimbursing someone for dinner, sending a gift to anyone, or paying the roommate their rent. This only applies when goods and services are provided. It would be a very good idea, however-when possible-to keep clear records and to separate business from personal to avoid misreporting on cases that may fall into a gray area.
Professional opinions
Mark Steber is the chief tax information officer at Jackson Hewitt said “These new thresholds do not adjust how the income has always been treated: The taxation and tax treatment requirements for taxpayers have not changed. This income has always been considered by the IRS to be taxable and should be reported on a tax return.”
Steps for taxpayers
To align with these new requirements, taxpayers should:
- Record keeping: Records of all the transactions, which are personal or business-related, will have to be kept.
- Report all incomes: All incomes from the sale of goods and services, no matter how meager, will have to be reported for tax purposes.
- Consult tax advisors: The advice of a tax expert will have to be sought in order to navigate this new reporting law.
