When submitting your tax return the following year, anyone who earned money last year through the use of PayPal, Venmo, Cash App, or any other third-party payment app must adhere to new rules set forth by the Internal Revenue Service (IRS).
You must file tax form 1099-K if you received payment through a third-party payment app in 2024 and your untaxed income exceeded $5,000. The IRS has confirmed that this regulation would apply to taxes in 2024, and it has been mentioned previously. After that, this amount will drop to $2,500 in 2025 and $600 in 2026.
The rationale is to close the gap between these apps’ current and future reporting needs. “The US Department of Treasury is still working on the 2024 rules resulting from the Inflation Reduction Act,” states Mark Steber, Jackson Hewitt’s chief tax information officer.
Before 2024, a 1099-K tax record required $20,000 in profits and 200 transactions; by 2025, the income threshold from a third-party platform will be $600.
Even if they do not receive a 1099 form for all earnings, self-employed people are still required to report their entire income for tax purposes. A change to tax reporting has strengthened this long-standing requirement, with the IRS concentrating on third-party payment apps to identify unreported transactions.
For income received through platforms like Venmo or Cash App from side gigs, freelance employment, or contractor positions where no taxes are withheld, a 1099-K tax form is required. At the moment, if a user receives more than $20,000 in commercial payments from more than 200 transactions in a year, these applications are required to submit a 1099-K.
In order to reduce the likelihood of errors and give the agency time to decide how the fines will be identified and administered, the American Rescue Plan implemented a new $600 earnings cap, although the distribution has been slower than anticipated. According to Steber, taxpayers’ responsibilities regarding taxes and tax treatment have not changed.
This taxable income has always been considered taxable by the IRS and must be reported on a tax return. Online platforms must now submit 1099-Ks to the IRS and users at a lower level than in prior years due to the new adjustment.
Due to the widespread availability of this new technology, it is not always easy to discern between taxable and nontaxable transactions using third-party apps, which is the cause of this delay.
It is hard to tell if the money was used for rent or an art commission when PayPal, Venmo, Cash App, or Zelle are used in casual, friendly transactions. People also usually lie about the reason for the transactions, not because they have anything to hide but rather because it is not necessary to be honest with friends. Rather than being a company, an active user could just be someone who values financial openness with their peers.
IRS Commissioner Danny Werfel stated in a November 2023 announcement that the agency is working to find a solution. After several months of collecting input from outside organizations and others, it became more and more obvious that we require more time to successfully execute the new reporting requirements.
Steber cautions ardent users that this is exclusively for revenue from self-employment. Though certain platforms may inadvertently include personal transactions in the 1099-K, which must be corrected on the user’s tax return, you shouldn’t receive a 1099-K for personal transactions.
Which payment apps are included in this IRS rule?
The company will work with freelance platforms like Fivver or Upwork to report payments received by freelancers throughout the year, although the most popular ones are PayPal, Venmo, Zelle, and Cash App.
Maintaining distinct business and personal accounts will help users and facilitate IRS reporting; but, if you use such apps and choose to send money to friends or family, that money will not be included against the amount you need to disclose to the IRS.
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Eliot Pierce is a dedicated writer for ChiefsFocus.com, covering local crime and finance news. With a keen eye for detail and a passion for storytelling, Eliot aims to provide his readers with clear and insightful analysis, helping them navigate the complexities of their financial lives while staying informed about important local events. His commitment to delivering accurate and engaging content makes him a valuable resource for the community.