In 2024, the IRS is set to roll out a significant change in its reporting requirements for third-party payment apps like PayPal, Venmo, Cash App, and Zelle. Freelancers and business owners need to stay informed about these changes to navigate the complexities of tax reporting. This blog post will guide you through the key aspects of the IRS rule change, helping you understand its implications on personal finance, investment, and the share market.
The IRS 1099-K Reporting Change: A Brief Overview
The IRS, originally planning to implement the new 1099-K reporting requirement in 2022, has delayed it twice. The change mandates payment apps to report income over $600 to the tax agency, eventually reducing the threshold to $5,000. This adjustment aims to minimize inaccuracies and provide both the IRS and payment apps with more time to adapt.
Understanding the IRS $600 Payment Rule
Under the American Rescue Plan, payment apps are required to report earnings over $600 to the IRS, with a phased rollout for 2024 focusing on income exceeding $5,000. This shift ensures better tracking of transactions that might otherwise go unreported, placing the responsibility on payment apps to keep accurate records.
Implications for the 2023 Tax Return
The IRS temporarily paused the reporting requirement for 2023, but freelancers still need to report their earnings for the tax year. However, they won’t receive a 1099-K form from third-party apps unless payments exceed $20,000 across 200 transactions in 2023. Instead, freelancers may receive 1099-NECs from businesses they work with.
Looking Ahead: 2024 Tax Return and Applicability
For tax year 2024, freelancers will receive a 1099-K if they earn more than $5,000 through third-party payment apps, impacting tax filings in 2025. The IRS may still revise the rule, so freelancers should stay updated on any changes.
Payment Apps Included in the IRS Rule
All third-party payment apps, including PayPal, Venmo, Zelle, Cash App, and platforms like Fivver or Upwork, must start reporting transactions to the IRS in 2024. Freelancers are advised to set up separate accounts for professional transactions to avoid inaccuracies on their 1099-K.
Taxation of Money Sent to Family or Friends
Contrary to rumors, the IRS does not tax money sent to family or friends through payment apps. Personal transactions, such as gifts or reimbursements, are non-taxable. Ensuring that payments are flagged correctly can prevent errors on the 1099-K.
Earnings from Selling Personal Items and Side Hustles
Selling personal items at a loss doesn’t incur taxes, but profits from a side hustle exceeding $5,000 through payment apps are taxable. Keeping meticulous records and seeking professional advice can help freelancers navigate these tax implications.
Key information for freelancers to navigate the IRS reporting changes in 2024:
| Aspect | Details |
|---|---|
| IRS Reporting Change | Phased rollout in 2024; payment apps report earnings exceeding $5,000 instead of $600. |
| IRS $600 Payment Rule | Reporting requirement paused; freelancers are still obligated to report 2023 earnings. No 1099-K unless earnings exceed $20,000 in 200 transactions; may receive 1099-NECs from businesses. |
| 2023 Tax Return | PayPal, Venmo, Zelle, Cash App, and other platforms like Fivver or Upwork are required to report transactions to the IRS in 2024. |
| 2024 Tax Return | Expect a 1099-K if earnings surpass $5,000 through payment apps; impact on 2025 tax filings. Rule subject to potential IRS revisions. |
| Payment Apps Included | Personal transactions (gifts, favors, reimbursements) are not taxable. Ensure correct categorization to prevent errors on the 1099-K. |
| Taxation of Family/Friend Payments | Personal transactions (gifts, favors, reimbursements) not taxable. Ensure correct categorization to prevent errors on the 1099-K. |
| Earnings from Selling Items | Selling personal items at a loss is non-taxable. Side hustle profits exceeding $5,000 through payment apps are taxable. Maintain detailed records and seek professional advice. |
| Preparing for Reporting Change | Payment apps may request tax information (EIN, ITIN, or SSN). Expect a streamlined filing process, with a consolidated 1099-K for multiple clients paying through payment apps. |
This table provides a quick reference for freelancers, offering insights into the key aspects of the IRS reporting changes and how they may impact tax obligations.
How to Prepare for the Reporting Change
Freelancers should expect payment apps to request tax information, such as EIN, ITIN, or SSN. The transition may streamline the filing process for self-employment taxes, consolidating multiple 1099-NECs into a single 1099-K.
Conclusion:
As the IRS undergoes significant changes in reporting requirements, freelancers must proactively prepare for the 2024 tax year. Staying informed about the IRS rule changes, organizing transactions, and seeking professional advice will empower freelancers to navigate the evolving landscape of tax reporting on payment apps effectively.