The IRS has announced significant changes to tax reporting requirements for payment apps like PayPal, Venmo, and Cash App, set to take effect in 2024. These changes aim to enhance tax compliance among freelancers and individuals earning income through these platforms, ensuring that more transactions are reported to the IRS.
Key Takeaways
New reporting requirements for payment apps will affect freelancers and side hustlers.
The threshold for reporting income will gradually decrease from $5,000 in 2024 to $600 by 2026.
Personal transactions between friends and family remain non-taxable.
Overview of the New Tax Rules
Starting in 2024, the IRS will require third-party payment platforms to issue a 1099-K tax form to users who earn self-employment income exceeding $5,000. This change is part of a phased rollout that will eventually lower the reporting threshold to $600 by 2026. The aim is to curb tax evasion by ensuring that income earned through these platforms is accurately reported.
What Is a 1099-K?
A 1099-K is a tax form that reports income received via third-party payment platforms. It is similar to other 1099 forms but specifically focuses on income from non-permanent jobs, such as freelance work or side hustles. The IRS has long required individuals to report all taxable income, regardless of whether they receive a tax form.
Changes in Reporting Requirements
Previously, payment apps were only required to report income if users earned over $20,000 and completed more than 200 transactions. Under the new rules:
2024: Reporting threshold set at $5,000.
2026 and Beyond: Reporting threshold will drop to $600.
This change is designed to improve the IRS's ability to monitor income that might otherwise go unreported, particularly among gig workers and freelancers.
Impact on Personal Transactions
It's important to note that not all transactions through these payment apps will be subject to reporting. Personal transactions, such as payments for shared expenses or gifts, are not considered taxable. For example:
Money sent to a friend for dinner is non-taxable.
Payments for rent shared with a roommate are also non-taxable.
Only transactions flagged as payments for goods or services will be reported on the 1099-K.
Preparing for the Changes
To prepare for these new reporting requirements, users of payment apps should:
Ensure their tax information is up to date on the platforms.
Keep accurate records of all transactions, especially those related to freelance work.
Consider setting up separate accounts for personal and business transactions to avoid confusion.
Conclusion
The IRS's new tax rules for payment apps represent a significant shift in how income is reported and taxed. Freelancers and side hustlers should be aware of these changes to ensure compliance and avoid potential penalties. As the IRS continues to adapt to the growing gig economy, understanding these regulations will be crucial for anyone earning income through digital platforms.
Sources
IRS issues new digital asset tax rules; industry groups sue, CoinGeek.
- YouTube, YouTube · ABC Action News.
If You Made Money via PayPal, Venmo or Cash App in 2024, Get Ready for This IRS Tax Change - CNET, CNET.
Comments