The IRS has issued new guidelines for income received through payment apps like Venmo and PayPal. These rules will impact many freelancers and side hustlers. Starting in 2024, third-party payment platforms will send users a 1099-K form if they earn more than $5,000.
The threshold will drop to $2,500 for 2025. By 2026, it will decrease to $600. These changes are part of the American Rescue Plan.
They were initially scheduled for 2022 but were delayed. Before, the threshold for receiving a 1099-K was much higher at $20,000 and more than 200 transactions. The rules only apply to income-generating transactions.
Personal transactions, like splitting rent or bills with friends, are not subject to the new reporting requirements. Freelancers and others who use these apps for business should prepare for the changes. This will help avoid surprises at tax time.
The IRS has confirmed that PayPal, CashApp, Venmo, and Zelle will soon report transactions above a certain amount. For 2024 or 2025, the limit is $5,000. For 2026 and beyond, it drops to $600.
The regulation was passed several years ago, but the IRS delayed it due to concerns about taxpayer confusion. Technically, you should have been reporting this income all along. Now, the IRS is ensuring you pay taxes on it by making payment platforms report it.
Personal payments don’t fall under this law, no matter the amount. Platforms offer the option to mark transactions as personal or for goods and services when sending money. Payments received under goods and services will appear on the 1099-K form.
Telling customers to mark a payment as personal is illegal. If you receive money from many accounts, the platform will usually ask if you’re a business. If you say no and the activity continues, the company will investigate.
New IRS thresholds for payment apps
The platforms want to remain in compliance with tax regulations. The IRS requires companies to send you a 1099-K by Jan.
31 of the following year if you meet the requirements. If you earned more than $5,000 in untaxed income in 2024 via a third-party payment app, you will need to complete a tax form. This number will drop to $2,500 in 2025 and $600 in 2026.
The goal is to bridge the gap between current and future reporting requirements. Mark Steber, Chief Tax Information Officer for Jackson Hewitt, explains that the Treasury Department is moving forward on the 2024 rules from the Inflation Reduction Act. Prior to 2024, the earnings threshold was $20,000 and 200 transactions to receive a 1099-K.
In 2025, the income threshold will be $600. Self-employed individuals must report their total income for taxes, even without a 1099 for all earnings. This long-standing rule is now supported by a tax reporting change, shifting the focus to third-party payment apps to track unreported transactions.
A 1099-K is issued for income received through platforms like Venmo or Cash App from side jobs, freelance work, or contractor roles where taxes aren’t withheld. Currently, these apps must issue a 1099-K if a user earns over $20,000 in commercial payments across more than 200 transactions in a year. The American Rescue Plan announced the new $600 earnings limit, but the rollout has been slower than anticipated.
This is to reduce the risk of inaccuracies and give the IRS time to determine penalty implementation. The delay is largely due to the complexities of distinguishing between taxable and nontaxable transactions. With apps being used for everyday transactions, it can be challenging to determine if money was exchanged for rent or an art commission.
Personal transactions may mistakenly be included in tax reports, which means users must correct this on their returns. IRS Commissioner Danny Werfel stated in November 2023 that the agency is working on solving these issues. They spent months gathering feedback and realized they need more time to effectively implement the new reporting requirements.
Steber cautioned, “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, which will need to be corrected on the user’s tax return.”
The most common apps included are PayPal, Venmo, Zelle, and Cash App. The IRS will also work with freelance platforms like Fiverr or Upwork to report payments.
Users are advised to keep separate business and personal accounts. Transactions marked as “sending money to family or friends” will not be included in the amount reported to the IRS.
