The IRS has implemented a new tax-reporting rule for freelancers who earn $5,000 or more through third-party apps like PayPal, Venmo, and Cash App. These companies are now required to issue tax form 1099-K detailing the earnings of freelancers. This rule is not a new tax rule but rather a reporting change to ensure that all income, including freelance and self-employment income, is reported and taxed. The IRS is switching the reporting requirement to payment apps to track transactions that may otherwise go unreported.
Under the new reporting requirements announced in the American Rescue Plan, third-party payment apps are now required to report earnings over $600 to the IRS. For the 2024 tax year, the IRS will phase in a new threshold of $5,000 for reporting earnings from third-party apps, instead of the previous $600 limit. This change aims to reduce inaccuracies in reporting and give both the IRS and payment apps time to adjust to the new requirements. The delayed implementation of this rule was due to the complexities of distinguishing between taxable and nontaxable transactions through third-party apps.
Popular payment apps like PayPal, Venmo, Cash App, Fivver, and Upwork are required to report transactions involving freelancers and business owners to the IRS in 2024. By setting up separate accounts for professional transactions on these platforms, freelancers can avoid including nontaxable charges, such as money sent from family or friends, in their 1099-K forms. However, Zelle users will not receive a 1099-K as Zelle does not hold funds in an account but is used for bank transfers.
Rumors suggesting that the IRS is taxing money sent to family and friends through third-party apps are false. Personal transactions, such as gifts, restaurant bills, and rent payments, are not considered taxable and will not be reported on the 1099-K. Only self-employment income from freelance or small business services is subject to reporting on the tax form. Selling personal items for less than the purchase price through platforms like Facebook Marketplace or Poshmark does not incur taxes, but earnings from reselling items for a profit will be taxable.
To prepare for this reporting change, freelancers should confirm their tax information, such as their EIN, ITIN, or SSN, with payment apps and be ready to receive 1099-K forms for earnings over $5,000. Keeping track of earnings manually or with accounting software like Quickbooks can help freelancers avoid reporting confusion and ensure accurate tax filing. By understanding the new reporting requirements and preparing for them, freelancers can stay compliant with IRS rules and avoid any tax-related issues.
