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 initially of 2022, the IRS deliberate to implement a brand new reporting rule that might require third social gathering fee apps, like PayPal, Venmo, Money App or Zelle, to report revenue incomes over $600 or extra per 12 months to the tax company.
In November final 12 months, the IRS introduced it will delay the rule for the second 12 months in a row. Why? Distinguishing between taxable and nontaxable transactions via third-party apps is not at all times straightforward. For instance, cash your roommate sends you thru Venmo for dinner shouldn’t be taxable, however cash obtained for a graphic design mission is. The pause offers fee platforms extra time to arrange.
“We spent many months gathering suggestions from third-party teams and others, and it grew to become more and more clear we want extra time to successfully implement the brand new reporting necessities,” stated 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 in the event you earned cash via PayPal or one other fee platform in 2023? Here is every little thing it’s essential know as we dive into tax season.
What is the IRS $600 fee rule?
Beneath new reporting necessities first introduced within the American Rescue Plan, third-party fee apps will ultimately be required to report earnings over $600 to the IRS.
In your 2024 taxes (which you may file in 2025), the IRS is planning a phased rollout, requiring fee 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 fee apps extra time to work towards the eventual $600 minimal.
Beforehand, third-party apps solely despatched 1099-Ks to customers who obtained $20,000 in industrial funds throughout greater than 200 transactions.
If you happen to’re self-employed, it is best to already be paying taxes in your complete revenue, even in the event you do not obtain a 1099 from your whole earnings. This is not a brand new rule; it is a tax reporting change. The IRS can be switching the reporting requirement to fee apps so it could possibly hold tabs on transactions that usually go unreported.
What the IRS 1099-Okay change means to your 2023 tax return
The IRS paused this reporting requirement for 2023. This implies in the event you earn freelance revenue, you may report your earnings like ordinary once you file your taxes this 12 months. 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 in the event you do not obtain a tax kind from a consumer, you are still on the hook for reporting your whole self-employment revenue.
What the IRS 1099-Okay rule means to your 2024 tax return
For tax 12 months 2024, you may obtain tax kind 1099-Okay in the event you earn greater than $5,000 from a contract consumer or aspect hustle via third-party fee apps, affecting the taxes you may file in 2025. The IRS could resolve to once more delay this rule or alter the brink, so it is doable this requirement may change.
What fee apps are included on this IRS rule?
All third-party fee apps the place freelancers and enterprise homeowners obtain revenue are required to start reporting transactions involving you to the IRS in 2024. Some fashionable fee apps embrace PayPal, Venmo, Zelle and Money App. Different platforms freelancers could use, similar to Fivver or Upwork, are additionally on the hook to start reporting funds that freelancers obtain all year long.
If you happen to earn revenue via fee apps, it is a good suggestion to arrange separate PayPal, Zelle, Money App or Venmo accounts to your skilled transactions. This might forestall nontaxable expenses — cash despatched from household or mates — from being included in your 1099-Okay in error.
Will the IRS tax cash despatched to household or mates?
Rumors have circulated that the IRS was cracking down on cash despatched to household and mates via third-party fee apps, however that is not true. Private transactions involving presents, favors or reimbursements aren’t thought-about taxable. Some examples of nontaxable transactions embrace:
- Cash obtained from a member of the family as a vacation or birthday reward
- Cash obtained from a good friend overlaying their portion of a restaurant invoice
- Cash obtained out of your roommate or accomplice for his or her share of the lease and utilities
Funds that can be reported on a 1099-Okay should be flagged as funds for items or companies from the seller. When you choose “sending cash to household or mates,” 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 secure.
Will you owe taxes on objects offered via Fb market?
If you happen to promote private objects for lower than you paid for them and accumulate the cash through third-party fee apps, these adjustments will not have an effect on you. For instance, in the event you purchase a sofa to 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’ve got offered at a loss. You might be required to indicate documentation of the unique buy to show that you simply offered the merchandise at a loss.
When you have a aspect hustle the place you purchase objects and resell them for a revenue through PayPal or one other digital fee app, then earnings over $5,000 can be thought-about taxable and reported to the IRS in 2024.
Be sure that to maintain report of your purchases and on-line transactions to keep away from paying taxes on any nontaxable revenue — and when doubtful, contact a tax skilled for assist.
How one can put together for this reporting change
Any fee apps you utilize could ask you to verify your tax info, similar to your employer identification quantity, particular person tax identification quantity or Social Safety quantity. If you happen to personal a enterprise, you almost certainly have an EIN, however in the event you’re a sole proprietor, particular person freelancer or gig employee, you may present an ITIN or SSN.
In some circumstances, receiving a 1099-Okay could take a few 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 in the event you have been paid via direct deposit, verify or money. When you have a number of purchasers who pay you thru PayPal, Venmo, Upwork or different third-party fee apps and you earn greater than $5,000, you may obtain one 1099-Okay as a substitute of a number of 1099-NECs.
To keep away from any reporting confusion, be sure to’re monitoring your earnings manually or with accounting software program similar to Quickbooks.
