New IRS 1099-K Tax Rule: Here’s What Freelancers Who Made Money With PayPal or Cash App Need to Know
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After two consecutive delays, the IRS is moving forward with a new tax reporting rule for freelancers who get paid through third-party apps. If you’ve earned $5,000 or more through PayPal, Venmo, Cash App, or similar platforms, the IRS will now require these companies to issue tax form 1099-K detailing your earnings.
This is not a new tax requirement; it is a tax reporting change. If you earn income as a freelancer or self-employed person, you already have to pay taxes on your total income, even if you don’t receive a 1099 form. The IRS is switching reporting requirements to payment apps so it can keep an eye on transactions that often go unreported.
“The taxation requirements and tax treatment for taxpayers have not changed,” said Mark Steber, head of tax information at Jackson Hewitt. “This taxable income has always been considered taxable by the IRS and must be reported on a tax return. The new change requires the online platforms to provide 1099-Ks to both their users and the IRS at a lower threshold than in previous years.”
The IRS only requires third-party apps to report earned income; the tax authorities are not interested in the money you sent to your family or friends to pay rent or split the dinner bill.
If you earned $5,000 or more this year through third-party payment apps, you’ll receive a 1099-K when you file your 2025 tax return to report your income. Here’s everything you need to know about this reporting change.
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What is a 1099-K?
A 1099-K is a tax form that reports income received through a third-party payment platform from a non-permanent job, such as a part-time job, a freelance contract, or a contract position where no taxes are withheld.
The IRS currently requires all third-party payment apps, such as Cash App and Venmo, to send a 1099-K to the IRS and individuals if they have earned more than $20,000 in commercial payments in more than 200 transactions. If you regularly earn more than $20,000 in freelance income, get paid via Venmo, and receive more than 200 transactions in payments, you may have previously received a 1099-K tax form.
What is the IRS’s new 1099-K rule?
Under new reporting requirements first announced in the American Rescue Plan, third-party payment apps will eventually be required to report income over $600 to the IRS.
“Before 2024, the income threshold was $20,000 and it took 200 transactions to receive a 1099K tax document,” Steber said.
For your 2024 taxes (which you’ll file in 2025), the IRS plans a phased rollout, requiring payment apps to report freelancer and business owner winnings of more than $5,000 instead of $600. The hope is that raising the threshold will reduce the risk of inaccuracies while giving the agency and payment apps more time to work toward the final $600 minimum.
Why has the tax rule for third-party payment apps been postponed?
Originally scheduled to launch in early 2022, the IRS planned to implement a new reporting rule that would require third-party payment apps such as PayPal, Venmo, or Cash App to report income exceeding $600 or more per year to the tax authorities report. . The IRS has postponed this new reporting requirement in 2022 and again in 2023.
Why? Distinguishing between taxable and non-taxable transactions via third-party apps is not always easy. For example, money your roommate sends you via Venmo for dinner isn’t taxable, but money you receive for a graphic design project might be. The delayed rollout gave payment platforms more time to prepare.
“We have spent many months gathering feedback from outside groups and others, and it has become increasingly clear that we need additional time to effectively implement the new reporting requirements,” IRS Commissioner Danny Werfel said in a statement. Statement of November 2023.
What payment apps are required to send 1099-Ks?
All third-party payment apps where freelancers and business owners receive income must start reporting transactions involving you to the IRS in 2024. Some popular payment apps include PayPal, Venmo, and Cash App. Other platforms that freelancers may use, like Fivver or Upwork, are also on the hook to start reporting payments that freelancers receive throughout the year.
If you earn income through payment apps, it’s a good idea to set up separate PayPal, Cash App, or Venmo accounts for your professional transactions. This can prevent non-taxable expenses (money sent from family or friends) from being incorrectly reported on your 1099-K.
Zelle users will not receive a 1099-K
There is one popular payment app that is exempt from the 1099-K rule. Payment transfer service Zelle will not issue 1099-Ksregardless of whether you receive business funds through the service or not. That’s because Zelle doesn’t hold your money in an account like PayPal, Venmo, or Cash App, but instead is used as a way to transfer money between bank accounts. If you get paid for your freelance or small business services through Zelle, it is your responsibility to report all income on Schedule C of your tax return.
Does the IRS tax money you send to family or friends?
No. Rumors are swirling that the tax authorities are cracking down on money sent to family and friends through third-party payment apps, but that’s not true. Personal transactions involving gifts, favors, or refunds are not considered taxable. Some examples of non-taxable transactions include:
- Receiving money from a family member as a holiday or birthday gift
- Receiving money from a friend to cover their share of a restaurant bill
- Money you receive from your housemate or partner for his share of the rent and utilities
Payments reported on a 1099-K must be marked as payments for goods or services from the supplier. When you select ‘Send money to family or friends’, it will not appear on your tax form. In other words, your roommate’s money for her half of the restaurant bill is safe.
“This only applies to self-employment income,” Steber said. “You should not receive a 1099-K for personal transactions, but keep in mind that some platforms may accidentally include personal transactions in the 1099-K and this should be corrected on the user’s tax return.”
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Do you owe taxes if you sell items on Facebook Marketplace or Poshmark?
If you sell personal items for less than you paid for and collect the money through third-party payment apps, you won’t be affected by these changes. For example, if you buy a sofa for your home for $500 and later sell it on Facebook Marketplace for $200, you won’t owe taxes on the sale because it’s a personal item that you sold at a loss. You may be required to provide documentation of the original purchase to prove that you sold the item at a loss.
If you have a side business where you purchase items and resell them for a profit through PayPal or another digital payment app, earnings above $5,000 are considered taxable and reported to the IRS in 2024.
Make sure you keep records of your purchases and online transactions to avoid paying taxes on non-taxable income. If in doubt, contact a tax professional for assistance.
What should you do to prepare for this reporting change?
Any payment apps you use may ask you to confirm your tax information, such as your employer identification number, individual tax identification number, or social security number. If you run a business, you probably have an EIN, but if you’re a sole proprietor, individual freelancer, or handyman, you’ll provide an ITIN or SSN.
In some cases, receiving a 1099-K can take away some of the manual work of filing your self-employment taxes.
Once this rule goes into effect, you may still receive individual 1099-NEC forms if you were paid by direct deposit, check, or cash. If you have multiple customers who pay you via PayPal, Venmo, Upwork, or other third-party payment apps And If you earn more than $5,000, you will receive one 1099-K instead of multiple 1099-NECs.
To avoid reporting confusion, make sure you track your income manually or with accounting software such as Quickbooks.
