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What Do New 1099-K Payment App Rules Mean for Taxpayers?

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Updated for tax year 2023.

You may have heard about new tax reporting thresholds for businesses using third-party payment apps such as PayPal, Cash App, Venmo, etc. This has caused some confusion for app users, but we’re here to help you understand how it will (or won’t) affect your taxes next year.

These changes were originally supposed to go into effect for tax year 2023, but the IRS recently delayed these changes. Now, the reporting threshold for 2024 is $5,000 and the $600 threshold will not officially go into effect until tax year 2025.

Form 1099-K frequently asked questions

What’s changed with Form 1099-K?

Previously, payment platforms were not required to report business transactions to the IRS unless you made at least 200 separate transactions totaling at least $20,000 in a calendar year. After the IRS delay, these thresholds still apply for tax year 2023. However, even if you don’t meet these thresholds, you might still receive Form 1099-K for 2023 if you were subject to backup withholding or live in a state with a lower reporting threshold.

Beginning Jan. 1, 2024, these thresholds are scheduled to drop — beginning in 2024, payment apps must report business transactions totaling $5,000 or more in a calendar year, regardless of the number of transactions you made. The threshold will drop again to $600 in 2025, unless the IRS decides to make more changes.

You’ll receive Form 1099-K from a payment app if you meet the applicable threshold. A 1099-K form is an informational tax document detailing the gross amount of all your reportable transactions.

Why is the reporting threshold for Form 1099-K changing?

The new tax 1099-K reporting threshold is part of a provision in the American Rescue Plan passed in 2021. Many people turned to side hustles during the pandemic to fill their time and make some extra cash while stuck at home. With the gig economy growing, these lower thresholds aim to lessen the amount of unreported and underreported taxable income from individuals and small businesses.

Will this impact me if I only use payment apps for personal transactions?

The new 1099-K payment app requirements will only affect app users who sold goods and services for a profit and accepted payment cards (credit or debit) or used third-party payment networks (PayPal and similar apps) for the payment of these goods and services.

If you only use payment apps for personal transactions between family and friends — think reimbursing a roommate for your half of the rent or your share of expenses during a night out — you should be in the clear. Some apps like PayPal and Venmo even allow users to select a designated “friends and family” category when making a transaction to avoid it potentially being flagged as a business payment.

Will I get a 1099-K if I sell items on eBay or other online marketplaces?

You will receive Form 1099-K for tax year 2023 if your transactions totaled $20,000 or more and you had at least 200 transactions. 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 on eBay 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. These types of transactions are generally excluded from your gross income and are not subject to income tax. So, if you only use payment apps or online marketplaces for these reasons, you don’t need to worry.

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.

Freelancers who use these apps, 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. You may also receive a 1099-K detailing other nontaxable transactions, like reimbursements from a roommate for rent payments you made. Unfortunately, it’s 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.

Keeping your business finances separate from your personal finances is a good rule of thumb. To limit the possibility of incorrectly receiving a 1099-K, always make sure to keep your personal and commercial 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 FAQ page from the IRS about the new payment card and third-party app requirements.

Will this increase my taxes?

Some people may mistake this for a new tax, but 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 required. Form 1099-K doesn’t change how much you pay in taxes. Rather, it’s the equivalent of the payment app saying, “FYI, these were your transactions this year, so don’t forget to report any taxable income.”

If you’ve been correctly reporting your income, you shouldn’t see any significant changes to your taxes next year. But if you’re new to the gig economy or you’ve been flying under the IRS’s radar because you haven’t received a 1099-K 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.

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.

Do I need to do anything else?

If you’ll be receiving Form 1099-K next year, app providers will reach out to let you know if they need any additional info from you, such as your employer identification number (EIN), taxpayer identification number (TIN), or Social Security number (SSN).

It’s also a good idea to make sure the name you use on your payment app matches the name the IRS has on file for you. This goes for individual names and legal business names. Name discrepancies could cause complications, which is the last thing anyone wants to deal with during tax season.

This article is for informational purposes only and not legal or financial advice.
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