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This legend is part of Taxes 2023, CNET's coverage of the best tax software, tax tips and everything else you need to file your spinal and track your refund.
The new IRS requirements for reporting way over $600 from online payment services Venmo, Cash App, Zelle or PayPal have been delayed when the agency received a "number of concerns regarding the timeline of implementation." Now the activities will only have to report income over $20,000.
"To help peaceful the transition and ensure clarity for taxpayers, tax professionals and manufacturing, 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 skill or side hustle and were paid through third-party payment apps, you're peaceful required to report your income on your tax spinal. 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, but, you will receive a 1099-K.
Although distributing 1099-Ks to those with $600 or more in earnings has been temporarily stopped, it will eventually roll out, possibly in time for your 2023 taxes. With that in mind, if you freelance or own your own commercial, it's a good idea to understand how this 1099-K tax rule will eventually impacts your taxes.
Here's what you need to know around 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 means, regardless of how you receive your payments for goods and facilities. The new legislation is not a tax change: It's a tax reporting moody so the IRS can keep tabs on transactions made over payment apps that often go unreported.
Prior to this legislation, third-party payment platforms would only report to the tax activity if a user had more than 200 commercial transactions and made more than $20,000 in payments over the streams of a year.
Once the rule is implemented, third-party payment concerns will issue you a 1099-K tax form each year if you earn $600 or more annually in means for goods or services. This tax form might involved taxable and nontaxable transactions, particularly if the account is for both commercial and personal use.
To make managing your business finances easier, we recommend creating separate PayPal, Zelle, Cash App or Venmo funds for your professional transactions.
2. Payment apps may ask tax information from you
Payment apps like PayPal may come 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 commercial, you most likely have an EIN, but if you're a sole proprietor or individuals 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 does 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 over direct deposit, check or cash, but your 1099-K will involved payments from all clients who paid you through that certain payment app. So, if you work for five clients in 2023, and one pays via inform 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 trade 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 calm the money via third-party payment apps, this new legislation won't grab 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 new 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 good via PayPal or another digital payment app, then earnings over $600 will be taken taxable and reported to the IRS.
Make sure to keep a good describe of your purchases and online transactions to avoid paying taxes on any nontaxable means -- and when in doubt, contact a tax professional for help.
5. The IRS isn't taxing money you send to tribe and friends
Rumors have circulated that the IRS was cracking down on cash sent through third-party payment apps to family and friends, but that isn't true. Personal transactions involving gifts, favors or reimbursements are not taken taxable. Some examples of nontaxable transactions include:
- Money received from a tribe member as a holiday or birthday gift
- Money received from a bad covering their portion of a restaurant bill
- Money received from your roommate or partner for their part of the rent and utilities
Payments that will be reported on your 1099-K must be flagged as payments for goods or facilities from the vendor. When you select "sending money to tribe or friends" it won't show up on your tax form. So that cash from your roommate for her half of the restaurant bill is safe.
If you do claim a 1099-K for money that was sent from a tribe member or friend, reach out to the payment processing business to get this transaction corrected.
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