No, the IRS Isn’t Taxing Money You Send to Family and Friends on PayPal, Venmo or Cash App
The IRS is finally moving forward with a new tax reporting rule that will require services such as PayPalVenmo or Cash App for issue tax form 1099-K to freelancers and side hustlers who have earned over $5,000 through third-party payment apps. This means the IRS will know if you made money freelancing or under contract and won’t report it on your tax return.
If you earn freelancing or self-employmentyou should already be paying taxes on your gross earnings even if you don’t receive a 1099. This is not a new tax requirement; it’s a tax reports to change. The IRS will shift the reporting requirement to payment apps so it can keep tabs on transactions that often go unreported.
This new rule will only require third-party apps to report earned income — the IRS isn’t interested in the money you sent your family or friends to pay the rent or split the dinner bill.
This new tax reporting rule was first announced in 2021 to capture income over $600 that was paid through third-party payment apps. It was supposed to be put into operation in 2022, but it was delayed two years in a row. In 2023, the IRS announced that 2024 would be a transition tax year to give payment applications more time to prepare for the change. Instead of the $600 minimum, only individuals who earned more than $5,000 through third-party applications would receive a 1099-K.
“Prior to 2024, the threshold was $20,000 in earnings and 200 transactions to get a tax receipt of $1,099,000,” said Mark Steber, chief tax information officer for Jackson Hewitt.
If you earned $5,000 or more this year through third-party payment apps, you should receive a 1099-K to report your income when file a tax return in 2025. Here’s everything you need to know about this reporting change.
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What is a 1099-K?
A A 1099-K is a tax form that reports income earned through a third-party payment platform from non-deductible employment, such as a hustle, freelance arrangement, or contractor position.
The IRS currently requires any third party payment applications like Cash App and Venmo to send a 1099-K to the IRS and to individuals if they earned more than $20,000 in commercial payments in more than 200 transactions. If you regularly earn more than $20,000 in freelance income, get paid through Venmo, and accept more than 200 payment transactions, 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 US bailout, third-party payment apps will eventually be required to report earnings above $600 to the IRS.
For your 2024 taxes (which you’ll file in 2025), the IRS plans a phase-in that requires payment apps to report self-employed and business owner earnings over $5,000 instead of $600. We hope that raising the threshold will reduce the risk of inaccuracies while giving the agency and payment applications more time to work toward an eventual minimum of $600.
“The requirements for taxation and tax treatment for taxpayers have not changed,” said Steber. “This taxable income has always been considered taxable by the IRS and should be reported on the tax return. The new change requires online platforms to provide 1099-Ks to both their users and the IRS at a lower threshold than in previous years.” .”
Why was the 1099-K rule delayed?
Originally scheduled to begin in early 2022, the IRS planned to implement a new reporting rule that would require third-party payment applications such as PayPalVenmo or Cash App to report income of $600 or more per year the tax office. The IRS delayed this new reporting requirement in 2022 and again in 2023.
why? Distinguishing between taxable and non-taxable transactions through third-party applications is not always easy. For example, money your roommate sends you via Venmo for dinner isn’t taxable, but money received for a graphic design project is. 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 that we needed more time to effectively implement the new reporting requirements,” said IRS Commissioner Danny Werfel. Statement of November 2023.
Which payment applications are covered by this IRS rule?
All third parties payment applications If self-employed and business owners receive income, they must begin reporting transactions involving you to the IRS in 2024. Popular payment apps include PayPal, Venmo, and Cash App. Other platforms that freelancers can use, such as Fivver or Upwork, are also ready to start reporting payments that freelancers receive throughout the year.
If you earn through payment apps, it’s a good idea to set up separate PayPal, Cash App, or Venmo accounts for your professional transactions. This could prevent tax-free payments — money sent from family or friends — from being mistakenly included in your 1099-K.
Zelle users will not receive a 1099-K
There is one popular payment application that is exempt from the 1099-K rule. Payment transfer service Zelle will not issue 1099-Kswhether or not you receive trade funds through the Service. That’s because Zelle doesn’t hold your funds in an account like PayPal, Venmo, or the Cash App do, and is instead used as a way to transfer money between bank accounts. If you are paid for your freelance or small business services through Zelle, it is your responsibility to report all income on Schedule C of your tax return.
Sending money to family or friends for IRS taxation?
Nope. There have been rumors that the IRS has cracked down on money sent to family and friends through third-party payment apps, but that’s not true. Personal transactions involving gifts, favors or reimbursements are not considered taxable. Some examples of tax-free transactions include:
- Money received from a family member as a holiday or birthday gift
- Money received from a friend to cover their portion of the restaurant bill
- Money received from your roommate or partner for their share of the rent and utilities
Payments that will be reported on the 1099-K must be marked as payments for goods or services from a supplier. When you select the “send money to family or friends” option, it will not appear on your tax form. In other words, the money from your roommate for her half of the restaurant bill is safe.
“It’s just for self-employment income,” Steber said. “You should not receive a 1099-K for personal transactions, but be aware that some platforms may accidentally include personal transactions in the 1099-K and this will need to be corrected on the users’ tax return.”
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Will you pay taxes on items sold on Facebook Marketplace?
If you’re selling personal items for less than you paid for them and withdrawing money through third-party payment apps, you won’t be affected by these changes. 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 that you sold at a loss. You may need to provide 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 sell them at a profit via PayPal or another digital payment applicationthen earnings over $5,000 will be considered taxable and reported to the IRS in 2024.
Make sure you keep good records of your purchases and online transactions to avoid paying taxes on any non-taxable income – and if in doubt, contact a tax professional for help.
How to prepare for this reporting change
Any payment applications 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 are a sole proprietor, self-employed, or gig worker, you will provide an ITIN or SSN.
In some cases 1099-K income can take some of the manual work out of filing self-employment taxes.
When this rule goes into effect, you can still receive individual Forms 1099-NEC if you received payment by direct deposit, check, or cash. If you have multiple clients who pay you through PayPal, Venmo, Upwork, or other third-party payment apps a you earn more than $5,000, you will receive one 1099-K instead of multiple 1099-NECs.
To avoid reporting confusion, make sure you track your earnings manually or with accounting software like Quickbooks.