In today's tax landscape, changes are on the horizon that could impact every taxpayer. With the IRS implementing a new tax reporting rule for 2024, it's crucial to stay informed. This article delves deep into the details of these changes and how they affect various aspects of our financial lives.
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What is a 1099-K?
A 1099-K is a vital tax form that documents income received through third-party payment platforms. It comes into play for non-permanent jobs like freelancing or contracting. Previously, the IRS required third-party apps to send a 1099-K if earnings exceeded $20,000 across 200 transactions. But now, for 2024 taxes (filed in 2025), the threshold has been lowered to $5,000. This change aims to capture more income while reducing inaccuracies.For instance, imagine a freelancer who regularly makes over $20,000 through Venmo. They might have received a 1099-K before. But with the new rule, even if their earnings are just over $5,000, they'll receive one. This form is crucial for reporting income accurately.What is the IRS’s new 1099-K rule?
Under the new reporting requirements announced in the American Rescue Plan, third-party payment apps will eventually report earnings over $600 to the IRS. For 2024 taxes, they'll start reporting earnings over $5,000 instead. This phased rollout is to give payment apps and the IRS more time to adapt.As Mark Steber, the chief tax information officer for Jackson Hewitt, explains, "The taxation and tax treatment requirements for taxpayers has not changed. This taxable income has always been considered by the IRS to be taxable and should 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 prior years."This means that taxpayers need to be aware of these changes and ensure they report their income correctly.Why was the third-party payment app tax rule delayed?
Originally set to start in 2022, the IRS delayed the new reporting rule due to the complexity of distinguishing between taxable and nontaxable transactions through third-party apps. For example, money sent between roommates for dinner is not taxable, but money received for a graphic design project is.IRS Commissioner Danny Werfel stated in a November 2023 statement, "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." This delay gave payment platforms more time to prepare and ensure accurate reporting.Which payment apps are required to send 1099-Ks?
All third-party payment apps where freelancers and business owners receive income are now required to report transactions to the IRS in 2024. Popular apps like PayPal, Venmo, and Cash App are on board. Even platforms like Fivver or Upwork, which freelancers use, are obligated to report payments.If you earn income through these apps, it's wise to have separate accounts for professional transactions. This can prevent nontaxable charges from being included on your 1099-K by mistake.Zelle users will not receive a 1099-K
One notable exception is Zelle. Payment transfer service Zelle is exempt from the 1099-K rule. Since it doesn't hold funds in an account like other apps, it's used for bank account transfers. If you're paid for freelance or small business services through Zelle, it's your responsibility to report all income on Schedule C of your tax return.Is the IRS taxing money you send to family or friends?
No, personal transactions like gifts, favors, or reimbursements are not taxable. Examples include money received from a family member as a holiday gift or from a friend covering a restaurant bill. Payments flagged as for goods or services from the vendor will be reported on a 1099-K.As Steber notes, "This is only for self-employment income. You should not receive a 1099-K for personal transactions but be aware that some platforms could accidentally include personal transactions in the 1099-K and that will need to be corrected on the users tax return."Will you owe taxes if you sell items on Facebook Marketplace or Poshmark?
If you sell personal items at a loss (bought for $500 and sold for $200), these changes won't affect you. But if you have a side hustle where you buy and resell items for a profit via PayPal or another digital payment app and earn over $5,000, it will be taxable and reported to the IRS in 2024.It's essential to keep good records of your purchases and online transactions to avoid paying taxes on nontaxable income. And if you're unsure, consulting a tax professional is always a good idea.What should you do to prepare for this reporting change?
Any payment apps you use may ask you to confirm your tax information. If you're a sole proprietor or gig worker, you'll provide an ITIN or SSN. In some cases, receiving a 1099-K can simplify filing self-employment taxes.Once the rule takes effect, you may still receive 1099-NEC forms for direct deposit, check, or cash payments. If you have multiple clients through third-party apps and earn over $5,000, you'll get one 1099-K instead of multiple 1099-NECs.To avoid reporting confusion, make sure you're tracking your earnings manually or using accounting software like Quickbooks.In conclusion, these new IRS reporting rules have significant implications for taxpayers. By understanding the details and taking the necessary steps to prepare, you can ensure a smooth tax-filing process. Stay informed and stay on top of your finances.READ MORE