The IRS has implemented a revised reporting requirement for income earned through third-party payment platforms like PayPal, Venmo, and Cash App. For the 2024 tax year, these platforms are required to send a 1099-K form to both the IRS and the individual if they earned over $5,000 in business-related transactions. This represents a significant change from the previous threshold of $20,000 and 200 transactions. This phased rollout aims to improve the IRS’s ability to track untaxed income and ensure accurate tax payments. It’s important to note that existing tax laws haven’t changed; this new rule simply strengthens reporting requirements. Income earned through these platforms has always been considered taxable, and individuals are responsible for reporting it, even if they don’t receive a 1099-K.
The 1099-K form is specifically designed to report income from non-permanent employment, such as freelance work, side hustles, or contractor positions where taxes aren’t withheld. While the IRS will have greater visibility into freelance earnings, the new rule only applies to business transactions. Personal transfers, like sending money to family or friends for gifts, shared expenses, or reimbursements, are not taxable and shouldn’t be reported. The payment platforms are expected to differentiate between business and personal transactions based on user designations, ensuring that only income from goods or services is reported on the 1099-K.
The original implementation of this rule was delayed twice due to the complexity of distinguishing taxable and nontaxable transactions on these platforms. The IRS initially planned to lower the reporting threshold to $600 in 2022, but postponed the change to allow payment platforms sufficient time to adapt their systems and accurately categorize transactions. The delay also provided an opportunity to gather feedback from stakeholders and refine the implementation process. The phased rollout with the $5,000 threshold offers a more manageable transition for both payment platforms and taxpayers.
Most third-party payment platforms, including PayPal, Venmo, Cash App, Fivver, and Upwork, are subject to the new reporting requirement. However, Zelle is exempt because it functions as a direct bank-to-bank transfer service and doesn’t hold funds in accounts like the other platforms. Therefore, if you receive business income through Zelle, you’re still responsible for reporting it on your tax return, even though you won’t receive a 1099-K. It’s recommended to maintain separate accounts for business and personal transactions on platforms like PayPal, Venmo, and Cash App to avoid any confusion or misreporting.
The sale of personal items at a loss is not considered taxable income. For instance, selling a couch on Facebook Marketplace for less than its original purchase price won’t trigger tax implications. However, if you engage in reselling activities as a business and generate a profit, any earnings over $5,000 through these platforms will be considered taxable income and reported to the IRS. Maintaining detailed records of purchases and sales is crucial to avoid paying taxes on non-taxable income. Consulting with a tax professional can provide further clarity and guidance on specific situations.
To prepare for this reporting change, be prepared to verify your tax information with the payment platforms you use. This might involve providing your Employer Identification Number (EIN), Individual Tax Identification Number (ITIN), or Social Security Number (SSN). Receiving a 1099-K can simplify the process of filing self-employment taxes, as it consolidates income information from various sources into a single form. Remember to continue tracking your earnings independently or through accounting software, even if you receive a 1099-K. This will ensure accurate record-keeping and help you reconcile your income with the information reported on the form.
