IRS Delays 1099-K Reporting: As tax season commences, individuals who have been awaiting the filing of a 1099-K should pay attention. Many taxpayers who had anticipated receiving a 1099-K will not be receiving one. The IRS has chosen to postpone the implementation of this new tax reporting requirement.
The IRS had initially intended to enforce a novel reporting regulation commencing in early 2022. This regulation would necessitate third-party payment applications, such as PayPal, Venmo, Cash App, or Zelle, to disclose annual income to the tax agency over $600.
The IRS announced in November of last year that the rule would be delayed for a second consecutive year. Why? It is not always straightforward to differentiate taxable from nontaxable transactions when using third-party applications. For instance, funds received for a graphic design project are taxable even though your roommate sent you dinner money via Venmo, which is not. The halt provides additional time for payment platforms to prepare.
In a statement released in November 2023, IRS Commissioner Danny Werfel said, “We spent many months gathering feedback from third-party groups and others, and it became increasingly clear that we need additional time to effectively implement the new reporting requirements.”
When does the new tax obligation become effective? In addition, what should you anticipate when you file your taxes in 2023 if you earned money via PayPal or another payment platform? The following is all the information you require as we enter tax season.
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What is the $600 payment rule for the IRS?
After the implementation of reporting obligations initially proposed in the American Rescue Plan, third-party payment applications will be obligated to disclose to the IRS any earnings exceeding $600.
The IRS is planning a phased implementation for your 2024 taxes (which you will file in 2025), requiring payment apps to report freelancer and business owner earnings above $5,000 as opposed to $600. Increasing the threshold is anticipated to mitigate the potential for errors and provide the agency and payment applications with an extended period to strive for the ultimate $600 minimum.
Before this, third-party applications could only issue 1099-Ks to users who had received commercial payments totaling $20,000 across more than $200 transactions.
You should be paying taxes on your total income if you are self-employed, even if you do not receive a Form 1099 for all of your earnings. This is a change in tax reporting, not a new regulation. The IRS intends to implement a reporting requirement for payment applications to monitor frequently unreported transactions.
Implications of the IRS 1099-K modification for your 2023 tax return
In 2023, the IRS suspended this reporting requirement. This means that freelancers will be required to disclose their earnings in the same manner as usual on their tax returns for the current year. Third-party applications will not generate a 1099-K unless you accumulate payments totaling more than $20,000 across more than 200 transactions in 2023.
You may instead receive 1099-NECs from any company with which you do business. Regardless of whether a client provides you with a tax form or not, you remain obligated to disclose all self-employment income.
Implications of the IRS 1099-K rule for your 2024 tax return
If your income from a freelance client or side hustle through third-party payment applications exceeds $5,000 for tax year 2024, you will be issued tax form 1099-K. This change will have an impact on the taxes you will file in 2025. The IRS may decide to delay this regulation once more or adjust the threshold, so this requirement could be modified.
Which payment applications do these IRS regulations affect?
By 2024, all third-party payment applications through which business proprietors and freelancers earn income will be obligated to commence disclosing transactions involving you to the IRS. Charging applications such as Cash App, PayPal, Venmo, and Zelle are well-known. Additional platforms that freelancers use, such as Fivver and Upwork, are required to start the process of reporting payments received by freelancers throughout the year.
It is advisable to establish distinct PayPal, Zelle, Cash App, or Venmo accounts for your professional transactions if you generate income via payment applications. This may prevent the inadvertent inclusion of nontaxable charges—money sent from family or friends—on your 1099-K.
Do IRS regulations apply to funds sent to family and friends?
It is untrue that the IRS was cracking down on funds transferred to family and acquaintances via third-party payment applications. Transactions of a personal nature that involve reimbursements, gifts, or favors are not subject to taxation. The following are examples of nontaxable transactions:
- Funds contributed by a relative in the form of a holiday or birthday present.
- Funds contributed by a friend to reimburse their share of a dining-out expense.
- Receipt of funds from a roommate or companion in exchange for their portion of the rent and utilities.
To be recognized on a 1099-K, payments must be designated as payments for services or products rendered by the vendor. If you indicate “sending money to family or friends,” that option will be omitted from your tax return. That is to say, the funds contributed by your flatmate towards her portion of the restaurant bill are secure.
Are taxes due on products sold via the Facebook marketplace?
These modifications will not impact you if you sell personal items for less than you paid for them and obtain the proceeds through third-party payment applications. You will not owe taxes on the sale of a $500 couch for your residence that you subsequently resell for $200 on Facebook Marketplace, as it is a personal item that you sold at a loss. Documentation about the initial purchase may be mandatory to substantiate the claim that the item was sold at a loss.
In 2024, earnings over $5,000 from a side venture consisting of purchasing items and reselling them for a profit via PayPal or another digital payment application will be deemed taxable and required to be reported to the IRS.
Ensure that you maintain detailed records of your online transactions and purchases to avoid paying taxes on any nontaxable income; if uncertain, seek the assistance of a tax professional.
Preparing for the forthcoming reporting change
You may be required to verify your tax information, including your Social Security number, employer identification number, or individual tax identification number, through the use of any payment application. You will likely provide an ITIN or SSN if you are a sole proprietor, individual freelancer, or contract worker, as opposed to an EIN if you own a business.
Obtaining a 1099-K may, in certain circumstances, reduce the amount of manual labor required to file self-employment taxes.
You may continue to receive individual 1099-NEC forms if you were paid via direct deposit, check, or cash after this regulation goes into effect. If you earn more than $5,000 from multiple clients who pay you via PayPal, Venmo, Upwork, or other third-party payment applications, you will receive a single 1099-K rather than multiple 1099-NECs.
Ensure that you are manually or electronically monitoring your earnings with accounting software such as Quickbooks to avoid any reporting confusion.
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