Last month, the Internal Revenue Service announced it would delay a tax reporting law requiring third-party payment services like PayPal, Venmo, Cash App or Zelle to report earnings over $600 to the IRS. This rule applies only to income receive through payment apps and not money sent to friends and family. The tax rule was also delayed last tax season.
This story is part of Taxes 2023, CNET’s coverage of the best tax software, tax tips and everything else you need to file your return and track your refund.
“We spent many months gathering feedback from third-party groups and others, and it became increasingly clear we need additional time to effectively implement the new reporting requirements,” IRS Commissioner Danny Werfel said in a Nov. 21 press release.
The IRS decided to postpone the change to prevent filing errors during the 2024 tax season. “An additional delay for tax year 2023 will avoid problems for taxpayers, tax professionals and others in this area,” Werfel said.
What does this mean? Well, if you earned more than $600 from a freelance client or side hustle and were paid through third-party payment apps, you likely won’t receive tax form 1099-K for your 2023 earnings. Instead, expect to receive a 1099-NEC from the business that employed you. Even if you don’t receive a 1099, you’re still required to report freelance income on your tax return.
If you received over $20,000 in payments across over 200 transactions in 2023, you will receive a 1099-K.
Although distributing 1099-Ks to those with $600 or more in earnings has been temporarily paused, it will eventually roll out — possibly in time for your 2024 taxes. With that in mind, if you freelance or own your own business, it’s a good idea to understand how this 1099-K tax rule will eventually impact your taxes.
Here’s what you need to know about 1099-Ks and how they will affect your taxes once the IRS rule is implemented.
It’s a tax reporting change
If you’re self-employed, you should already be paying taxes on your total income, regardless of how you receive your payments for goods and services. The new legislation is not a tax change: It’s a tax reporting change so the IRS can keep tabs on transactions made through payment apps that often go unreported.
Prior to this legislation, third-party payment platforms would only report to the tax agency if a user had more than 200 commercial transactions and made more than $20,000 in payments over the course of a year.
Once the rule is implemented, third-party payment companies will issue you a 1099-K tax form each year if you earn $600 or more annually in income for goods or services. This tax form might include taxable and nontaxable transactions, particularly if the account is for both business and personal use.
To make managing your business finances easier, we recommend creating separate PayPal, Zelle, Cash App or Venmo accounts for your professional transactions.
The IRS isn’t taxing money you send to family and friends
Rumors have circulated that the IRS was cracking down on money sent through third-party payment apps to family and friends, but that isn’t true. Personal transactions involving gifts, favors or reimbursements are not considered taxable. Some examples of nontaxable transactions include:
Money received from a family member as a holiday or birthday giftMoney received from a friend covering their portion of a restaurant billMoney received from your roommate or partner for their share of the rent and utilities
Payments that will be reported on a 1099-K must be flagged as payments for goods or services from the vendor. When you select “sending money to family or friends” it won’t show up on your tax form. So, that money from your roommate for her half of the restaurant bill is safe.
Payment apps may request tax information from you
If you receive payments via third-party apps, these platforms will likely reach out to you to confirm your tax information, such as your employer identification number, individual tax identification number or Social Security number. If you own a business, you most likely have an EIN, but if you’re a sole proprietor or individual freelance or gig worker, you’ll provide an ITIN or SSN.
If you freelance regularly, a 1099-K may reduce your tax forms
Here’s some good news: Once the rule is live, receiving a 1099-K may take some of the manual work out of filing your self-employment taxes. Currently, if you’re self-employed, you’ll receive a 1099-NEC tax form from each individual client you work for, when you earn more than $600.
Once this rule takes effect, you may still receive individual 1099-NEC forms if you were paid through direct deposit, check or cash, but your 1099-K will include payments from all clients who paid you through that particular payment app. So, if you work for five clients in 2024, and one pays via direct deposit, while the other four pay you through PayPal, you should receive two tax forms, instead of five. You’d get one 1099-NEC for the direct deposit client and one 1099-K from PayPal for the other four clients’ payments.
This can save you from spending your time tracking down paperwork and adding up third-party payments.
Items sold for a loss on Facebook Marketplace won’t be taxed
If you sell personal items for less than you paid for them and collect the money via third-party payment apps, this new legislation won’t affect you. For example, if you buy a couch for your home for $500 and later sell it on Facebook Marketplace for $200, you won’t owe taxes on the sale. That’s because it’s a personal item you’ve sold at a loss. However, you may be required to show documentation of the original purchase to prove that you sold the item at a loss.
If you have a side hustle where you buy items and resell them for a profit via PayPal or another digital payment app, then earnings over $600 will be considered taxable and reported to the IRS.
Make sure to keep a good record of your purchases and online transactions to avoid paying taxes on any nontaxable income — and when in doubt, contact a tax professional for help.