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This change in reporting requirements will require third-party payment apps to send the IRS a 1099-K for earnings over $5,000 in 2024
Did you work a side hustle or freelance gig this year and get paid through PayPal, Venmo, Cash App or another third-party payment app? If so, you may have new rules to follow when filing your tax return next year. You'll receive tax form 1099-K if you earned more than $5,000 in untaxed income in 2024 and were paid via a third-party payment app. This rule has been delayed two years in a row, and 2024 serves as a transition year to help payment apps prepare for the new reporting requirements. It's possible the IRS will decide to delay this rule again or alter the threshold. For now, you should plan on it moving forward to make sure you're prepared come tax time. If you're self-employed, you should already be paying taxes on your total income, even if you don't receive a 1099 from all of your earnings. This isn't a new rule; it's a tax reporting change. The IRS will be switching the reporting requirement to payment apps so it can keep tabs on transactions that often go unreported. If you were paid through third-party payment apps this year, here's what you need to know. What is a 1099-K? A 1099-K is a tax form that reports income received via a third-party payment platform from a non-permanent job, such as a side hustle, freelance agreement or contractor position where taxes are not withheld. The IRS currently requires any third-party payment apps like Cash App and Venmo to send a 1099-K to the IRS and individuals if they earned more than $20,000 in commercial payments across more than 200 transactions. If you regularly make over $20,000 in freelance income, are paid through Venmo, and receive more than 200 transactions in payments, you may have received a 1099-K tax form before. What is the new IRS 1099-K reporting rule? Under new reporting requirements first announced in the American Rescue Plan, third-party payment apps will eventually be required to report earnings over $600 to the IRS. For your 2024 taxes (which you'll file in 2025), the IRS is planning a phased rollout, requiring payment apps to report freelancer and business owner earnings over $5,000 instead of $600. The hope is that raising the threshold will reduce the risk of inaccuracies while also giving the agency and payment apps more time to work toward the eventual $600 minimum. Why was the 1099-K rule delayed? Originally set to kick off at the beginning of 2022, the IRS planned to implement a new reporting rule that would require third-party payment apps, like PayPal, Venmo, Cash App or Zelle, to report income of over $600 or more per year to the tax agency. But the IRS has delayed this new reporting requirement in 2022 and again in 2023. Why? Distinguishing between taxable and nontaxable transactions through third-party apps isn't always easy. For example, money your roommate sends you through Venmo for dinner is not taxable, but money received for a graphic design project might be. The delayed rollout gave payment platforms more time to prepare. "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," said IRS Commissioner Danny Werfel in a November 2023 statement. Which payment apps are included in this IRS rule? All third-party payment apps where freelancers and business owners receive income are required to begin reporting transactions involving you to the IRS in 2024. Some popular payment apps include PayPal, Venmo, Zelle and Cash App. Other platforms freelancers may use, such as Fivver or Upwork, are also on the hook to begin reporting payments that freelancers receive throughout the year. If you earn income through payment apps, it's a good idea to set up separate PayPal, Zelle, Cash App or Venmo accounts for your professional transactions. This could prevent nontaxable charges -- money sent from family or friends -- from being included on your 1099-K in error. Is the IRS taxing money sent to family or friends? No. Rumors have circulated that the IRS was cracking down on money sent to family and friends through third-party payment apps, but that isn't true. Personal transactions involving gifts, favors or reimbursements are not considered taxable. Some examples of nontaxable transactions include:
Will you owe taxes on items sold through Facebook marketplace? If you sell personal items for less than you paid for them and collect the money via third-party payment apps, these changes won't affect 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 because it's a personal item you've sold at a loss. You may be required to show documentation of the original purchase to prove that you sold the item at a loss. If you have a side hustle where you buy items and resell them for a profit via PayPal or another digital payment app, then earnings over $5,000 will be considered taxable and reported to the IRS in 2024. Make sure to keep a good record of your purchases and online transactions to avoid paying taxes on any nontaxable income -- and when in doubt, contact a tax professional for help. How to prepare for this reporting change Any payment apps you use may ask you to confirm your tax information, such as your employer identification number, individual tax identification number or Social Security number. If you own a business, you most likely have an EIN, but if you're a sole proprietor, individual freelancer or gig worker, you'll provide an ITIN or SSN. In some cases, receiving a 1099-K may take some of the manual work out of filing your self-employment taxes. Once this rule takes effect, you may still receive individual 1099-NEC forms if you were paid through direct deposit, check or cash. If you have multiple clients who pay you through PayPal, Venmo, Upwork or other third-party payment apps and you earn more than $5,000, you'll receive one 1099-K instead of multiple 1099-NECs.
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New capital gains thresholds for 2025
The IRS also adjusts the income thresholds for paying various capital gains tax rates for inflation, with low-income and some middle-income taxpayers enjoying a 0% tax rate on sales of stocks or other assets that have appreciated in value. In 2025, the 0% tax rate will cover individuals who earn up to $48,350 and married couples who earn up to $96,700. Single filers who earn between $48,350 and $533,400 will pay a 15% rate, and those earning above $533,400 will pay 20%. The IRS on Tuesday announced its new inflation-adjusted tax brackets for 2025, with the annual income thresholds rising by about 2.8% from 2024 — the smallest jump in several years. The IRS each fall announces inflation-adjusted changes to the tax brackets and dozens of other provisions for the following tax year. Because inflation jumped during the pandemic, the bracket adjustments were larger in the past few years, reaching 7% in 2023 and 5.4% in the current year. The idea is to protect taxpayers from "bracket creep" — when workers are pushed into higher tax bands due to the impact of cost-of-living adjustments aimed at offsetting inflation — without a change in their standard of living. "Bracket creep occurs when inflation, rather than real increases in income, pushes people into higher income tax brackets or reduces the value they receive from credits and deductions," Alex Durante, an economist at the Tax Foundation, noted in a Tuesday blog. But with U.S. inflation cooling to its lowest level in three years, the IRS' annual adjustments are likewise becoming smaller. For instance, the new threshold for the 10% tax bracket for married couples filing jointly will rise to $23,850 in 2025, a 2.8% increase from its 2024 threshold of $23,200. New standard deduction for 2025The standard deduction in 2025 will rise to $30,000 for married couples filing jointly, a roughly 2.7% increase from the current tax year's $29,200. Meanwhile, single filers and married couples filing separate returns will see their standard deduction rise to $15,000 from this year's $14,600. The standard deduction, which is used to reduce an individual's taxable income, is relied on by a majority of taxpayers, according to the Tax Policy Center. A married couple earning a combined $100,000 could use the 2025 standard deduction to reduce their taxable income to $70,000 for instance. The other option is to itemize one's annual tax deductions, but most people's deductions aren't large enough to exceed the standard deduction, which is why most taxpayers opt for the latter. How tax brackets workTaxation in the U.S. is progressive, meaning that tax rates increase as people earn more money. But some people incorrectly believe that their top rate is what they'll pay on all of their income. Instead, the brackets represent the percentage you'll pay in taxes on each portion of your income. For instance, married taxpayers who file jointly and earn more than $23,850 (the top threshold for the 10% bracket in 2025) could owe $2,385 in federal income tax — or 10% of their first $23,850 in earnings — and then 12% on any income above that amount, up to $96,950. (However, in reality, a couple in these brackets may owe little or get a refund due to the standard deduction as well as other deductions and tax credits.) New capital gains thresholds for 2025The IRS also adjusts the income thresholds for paying various capital gains tax rates for inflation, with low-income and some middle-income taxpayers enjoying a 0% tax rate on sales of stocks or other assets that have appreciated in value. In 2025, the 0% tax rate will cover individuals who earn up to $48,350 and married couples who earn up to $96,700. Single filers who earn between $48,350 and $533,400 will pay a 15% rate, and those earning above $533,400 will pay 20%. Married couples who earn between $96,700 to $600,050 will pay 15%, while those earning above the latter figure will pay 20%. Estate tax and tax-free giftsNext year, the federal estate-tax exclusion amount, which is the dollar figure for how much in assets can be sheltered from the estate tax, will rise to $13.99 million from $13.61 million in 2024. And in 2025, people will be able to give others up to $19,000 on a tax-free basis, up from $18,000 this year. The Earned Income Tax CreditThis tax credit, aimed at low- to middle-income workers with children, is also adjusting for inflation in 2025. That means that single people who qualify can claim $649 on their tax returns, about 2.7% higher than this year's $632. The maximum EITC that a family can claim next year is $8,046, up from $7,830 this year, but that only covers qualifying households with three or more children. What's not changing in 2025There are some provisions that aren't adjusted annually for inflation, which means they'll be unchanged next year compared with the current year. They include:
Additional BOI clarifications from online discussions regarding a CPA firm’s reporting obligations and confusions about reporting by entities that don’t register with a state for formation but which do file tax returns
Click to view video: https://vimeo.com/1007507701 The slides and citations for this week’s broadcast can be downloaded as a PDF below. 2024-09-09 Current Federal Tax Developments IR-2024-187, July 15, 2024 WASHINGTON — The Internal Revenue Service issued a consumer alert today following bad advice circulating on social media about a non-existent “Self Employment Tax Credit” that’s misleading taxpayers into filing false claims. Promoters and social media are marketing something they describe as the “Self Employment Tax Credit” as a way for self-employed people and gig workers to get big payments for the COVID-19 pandemic period. Similar to misleading marketing around the Employee Retention Credit, there is inaccurate information suggesting many people qualify for the tax credit and payments of up to $32,000 when they actually do not. In reality, the underlying credit being referred to in social media isn’t called the “Self Employment Tax Credit,” it’s a much more limited and technical credit called Credits for Sick Leave and Family Leave. Many people simply do not qualify for this credit, and the IRS is closely reviewing claims coming in under this provision so people filing claims do so at their own risk. “This is another misleading social media claim that’s fooling well-meaning taxpayers into thinking they’re due a big payday,” said IRS Commissioner Danny Werfel. “People shouldn’t be misled by outlandish claims they see on social media. Before paying someone to file these claims, taxpayers should consult with a trusted tax professional to see if they meet the very limited eligibility scenarios.” People who were self-employed can claim Credits for Sick and Family Leave only for limited COVID-19 related circumstances in 2020 and 2021; the credit is not available for 2023 tax returns. The IRS is seeing repeated instances where taxpayers are incorrectly using Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, to incorrectly claim a credit based on income earned as an employee and not as a self-employed individual. To qualify for the Sick and Family Leave Credits, self-employed workers have to meet a variety of technical reasons in 2020 and 2021 that didn’t allow them to work, including caring for an individual subject to a quarantine or isolation order. The IRS has a detailed set of FAQs describing the very technical requirements for meeting this provision of the law. The IRS is seeing some similarities to marketing around this “Self Employment Tax Credit” similar to aggressive promotion of the Employee Retention Credit. Both are technical credits that have been mischaracterized by some as a way for average taxpayers to get a big government payment. In reality, these are very limited credits that have a variety of complex requirements before people can qualify. The IRS urges people to check with a trusted tax professional before filing for any “Self Employment Tax Credit” or any other questionable tax claim circulating on social media. The IRS has previously warned taxpayers about misuse of the Sick and Family Leave Credits stemming from various tax scams and inaccurate social media advice that led thousands of taxpayers to file inflated refund claims during the past tax season. In addition to the Sick and Family Leave Credit, the IRS warned taxpayers not to fall for these scams centered around the Fuel Tax Credit and household employment taxes. The IRS has seen thousands of dubious claims come in where it appears taxpayers are claiming credits for which they are not eligible, leading to refunds being delayed and the need for taxpayers to show they have legitimate documentation to support these claims. The IRS continues to urge taxpayers to avoid these scams as myths continue to persist that these are ways to obtain a huge refund. Many of these scams were highlighted during this spring’s annual Dirty Dozen series, including the Fuel Tax Credit scam, bad social media advice and “ghost preparers.” “These improper claims have been fueled by social media and people sharing bad advice,” Werfel said. “Scam artists constantly prey on people’s hopes and try to use the complexity of the tax system to convince people there are secret ways to get a big refund. All of these scams illustrate that it’s important to carefully review the tax return for accuracy before filing and rely on the advice of a trusted tax professional, not someone trying to make a quick buck or a questionable source on social media.” |
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