Updated for tax years 2023 and 2024.
If you sell items online or use third-party payment apps such as Venmo® or Cash App®, you’ve probably heard about new IRS reporting thresholds that were supposed to go into effect first in 2022, and then in tax year 2023.
These threshold changes understandably caused much confusion among filers. As a result, the Internal Revenue Service (IRS) has postponed the 1099-K threshold change once again and announced a new threshold change set to go into effect in 2024.
To help keep sellers informed in the meantime, this article will help you understand these tax changes and what they will mean for the tax returns you’ll file for the coming tax years.
Recap of the 1099-K reporting threshold changes
For tax year 2023, online payment platforms are only required to report transactions to the IRS once you hit an annual threshold of $20,000 in gross payments and at least 200 transactions. The IRS confirmed these thresholds will remain in place for 2023.
Beginning Jan. 1, 2024, these thresholds will drop significantly. With the change, payment platforms (like PayPal®, Square®, Venmo, etc.) must report payments totaling $5,000 or more in a calendar year, with no transaction minimum. This is part of a phase-in process by the IRS to eventually implement the $600 threshold originally brought about by the American Rescue Plan. As it stands, the threshold is expected to drop again to $600 for tax year 2025, unless the IRS makes more changes.
If you meet the applicable threshold, you’ll receive Form 1099-K from a payment app or online marketplace. This is an informational tax document detailing the gross amount of all your reportable transactions.
Form 1099-K frequently asked questions
Why is the reporting threshold for Form 1099-K changing?
The American Rescue Plan passed in 2021 included a provision that introduced a new reporting threshold for Form 1099-K. During the pandemic, many people started side hustles to earn extra money while being stuck at home. As the gig economy continues to expand, the new lower thresholds are designed to reduce the instances of unreported and underreported taxable income from individuals and small businesses.
Will I need to pay tax on my transactions if I only use payment apps for personal payments?
The new 1099-K reporting requirements will only impact individuals who have made a profit by selling goods and services while receiving compensation through payment card transactions (debit or credit card) or by using third-party payment networks such as PayPal or similar apps.
If you solely use payment apps for personal transactions between family and friends — like splitting the rent or sharing expenses during a night out — then you don’t have to worry about it. This isn’t a new tax on all transactions made through these apps, it’s simply a report of all your transactions, taxable or not. Some apps offer a “friends and family” category that helps avoid flagging personal transactions as business payments.
Will I get a 1099-K if I sell items via online marketplaces?
If your transactions totaled $20,000 or more and you had at least 200 transactions through an online marketplace, you will receive Form 1099-K for tax year 2023. In 2024, you will receive Form 1099-K if you have any number of transactions that totaled $5,000 or more.
That being said, you only need to pay taxes on any profits you make. If, for example, you bought a new lawnmower for $1,000 a few years ago and you sold it online for $500 this year, you won’t have to pay any income tax on the sale.
Gifts, reimbursement, and selling personal items at a loss are excluded from income taxes. So, if you only use payment apps or online marketplaces for these reasons, you don’t need to worry about reporting those on your tax return.
What happens if a payment app sends me a 1099-K for a nontaxable transaction?
Even though personal transactions between friends and family don’t need to be reported, you may receive a 1099-K from a payment service app for nontaxable transactions. Since this is just an informational document, it doesn’t need to be included with your tax return.
Self-employed people may also find they don’t need their 1099-K. Freelancers who use these apps as payment processors, for example, might get a 1099-K from the payment app as well as a 1099-NEC from their client for the same transaction. In this case, you won’t need to report the income twice.
The IRS leaves it up to you, the taxpayer, to determine which payments are taxable and which aren’t. Generally, you will only owe income tax if you made a profit on the transaction, like selling a personal item for a gain. To limit the possibility of incorrect tax reporting, always make sure to keep your personal and business transactions separate on payment apps and don’t accept any nontaxable payments via debit or credit cards when possible.
If you want to read up on this issue further, check out this helpful 1099-K FAQ page from the IRS.
Will this increase my taxes?
If you’ve been reporting your taxable income correctly, this change should not increase your taxes. The tax laws have not changed — only the reporting requirements. Income made in exchange for goods and services has always been taxable. Now, there’s just a bit more paperwork involved.
However, if you’re new to the gig economy or you haven’t been reporting income correctly in the past, it might be a good idea to crunch some numbers and figure out how your taxes could be affected in the coming years. If you’re selling items for a profit, our capital gains tax calculator might be of help.
How do I report my 1099-K transactions on my tax return?
If you only sold personal items or made hobby income, you should report that income on Schedule D or Schedule 1, respectively. You can also check out How to File a 1099-K on TaxAct for more detailed and product-specific information.
If you are self-employed or run a business, you should report your 1099-K business payments as you would typically report your business income. Depending on your business structure, you should use Schedule C or Forms 1120, 1120-S, or 1065.
How payment app users and online sellers can prepare for tax season
Still unsure how to prepare for these changes? Here are three key steps to help you accurately file your income tax return for the coming tax years:
1. Practice good bookkeeping.
It doesn’t matter if you sold one item for profit or operated as a small business — keeping detailed records is essential for tax purposes.
The best thing you can do is save your receipts and keep organized documents of your transactions on every payment app you use. If you’re selling for business purposes, some of the most important records to keep track of include your cost of goods sold (usually what you originally paid for the item you are selling), shipping costs, fees, and any expenses for packing and shipping supplies. Be sure to keep track of any refunds paid to customers as well.
Tracking this information will help you determine your taxable income and prevent you from overreporting income which can result in an overpayment of income tax. Expenses like shipping and supply costs are generally deductible business expenses, so keep track of each item’s cost basis and the final sale price to determine the cost of goods sold. It’s also a good idea to take photos of the items you sold and place them with your records.
Organized, detailed records will help streamline your income tax return whether you file on paper or use an online tax filing software like TaxAct®.
Tax Tip: How long should you hold onto receipts? The IRS can typically audit tax returns filed within the last three years, so long as there is not a substantial error. Because of this, it is recommended that you keep receipts and other supporting documents for at least three years after filing your return or until the statute of limitations expires. This can vary depending on when you filed (or didn’t file) — if you’re unsure, it’s probably best to hold onto the receipts and consult a tax professional.
2. Make sure the payment platform has your TIN (SSN, EIN, or ITIN) on file.
When you registered for your payment platform account, you may not have provided your full TIN, which can be your SSN, EIN, or ITIN. Once you reach the sale threshold — $20,000 and over 200 transactions for 2023 or $5,000 in 2024 — the payment platform will ask you to provide your TIN to comply with IRS reporting requirements.
Make sure to confirm that the information you provide to the third-party platform is accurate and matches what the IRS has on file for you or your business. If the TIN you provide does not match IRS records, the payment platform will require that you upload a W-9 to correct your TIN. In the absence of a valid TIN, the IRS requires third-party payment platforms to withhold 24% of your gross proceeds as backup withholding. If this happens, you may receive a Form 1099-K even if you did not hit the federal reporting threshold.
3. Know how to use your Form 1099-K.
The Form 1099-K you’ll receive is an informational document designed to help you file your income tax return.
When filing, it is best practice to compare Form 1099-K against your personal records to ensure all your transactions are accounted for. The amounts reported on your Form 1099-K are gross proceeds, not necessarily income. To determine the income associated with each transaction, you will need to determine the cost basis of the item(s) sold.
It’s also important to note that transactions included on your Form 1099-K are based on the transaction settlement date, not the sale date. For example, if you sold an item on Dec. 31, 2023, but the funds did not settle until Jan. 2, 2024, that transaction would show up on your Form 1099-K for 2024 instead.
How you report your 1099-K income depends on what you sell and whether you run a business. If you are a sole proprietor, you will report your business profits using Schedule C. If you are a consumer selling capital assets or selling as a hobby, you will report any profits and losses using either Schedule D or Schedule 1.
If this is starting to sound like a lot, don’t panic. Reporting income from your 1099-K as a first-timer is not nearly as daunting as it sounds. If you choose to file with TaxAct, our intuitive tax prep software will ask questions about items you sold and pull all the necessary tax forms for you to file.
The bottom line
There’s no need to stress about your upcoming taxes. Think of the Form 1099-K you receive as a guide designed to help you determine your taxable income. Keep good records, understand that only profits are taxable, and verify that the third-party platform has your TIN to prevent delays or complications with your online sales.
By following these essential steps, you’ll be setting yourself up to file your federal income tax return with confidence.