The IRS has delayed new reporting requirements for online payment services, but you still may need to pay taxes on that money.
The 2023 tax season was supposed to be the first with mandatory 1099-K forms for taxpayers who earned more than $600 from online payment services like Venmo, Cash App, Zelle or PayPal. But after hearing a "number of concerns regarding the timeline of implementation," the IRS reversed course in December and said that the reporting requirements for "third-party settlement organizations" would not take effect this year.
"To help smooth the transition and ensure clarity for taxpayers, tax professionals and industry, the IRS will delay implementation of the 1099-K changes," said Doug O'Donnell, acting IRS commissioner, in a Dec. 23 press release.
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're still required to report your income on your tax return. However, you likely won't receive tax form 1099-K for your 2022 earnings.
If you received over $20,000 in payments across over 200 transactions in 2022, however, 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 2023 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.
1. 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.
2. Payment apps may request tax information from you
Payment apps like PayPal may 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.
3. If you freelance regularly, a 1099-K may reduce your tax forms
Here's some good news: Receiving a 1099-K can take some of the manual work out of filing your self-employment taxes. Previously, self-employed individuals would receive 1099-MISC or 1099-NEC tax forms from each individual client they worked for, when they earned more than $600.
Now, 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 2023, 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.
4. Items sold for a profit on Facebook Marketplace will be taxed, but personal belongings sold at a loss won't be
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.
But, 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.
5. 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 gift
- Money received from a friend covering their portion of a restaurant bill
- Money received from your roommate or partner for their share of the rent and utilities
Payments that will be reported on your 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.
If you do receive a 1099-K for money that was sent from a family member or friend, reach out to the payment processing company to get this transaction corrected.
First published on Jan. 8, 2022 at 6:00 a.m. PT.