Millions of freelancers, gig workers, solopreneurs, and contract workers breathed a collective sigh of relief in December 2022 when the Internal Revenue Service (IRS) delayed the new tax reporting requirement for third-party payment platforms like Venmo, Cash App, and PayPal.
Commonly known as the Venmo tax, the new law doesn’t just apply to Venmo: many peer-to-peer payment services will be required to issue 1099-K tax forms to individuals whose business transactions through those platforms exceed $600.
The IRS’s changes will now spring into effect for the 2023 tax year, which means the long-awaited 1099-K forms will hit mailboxes for the first time in January 2024. However, it’s important to note this delay is not a reversal, and the IRS said the goal was to provide a smooth transition period for taxpayers to better understand and comply with the policy.
Since many freelancers and self-employed individuals accept payments through peer-to-peer profiles, we know they have many questions—which is why we’re here to answer some of the most pressing as we dash towards tax season.
1099-K forms might be new to you, but they’re not new to millions of merchants. The form summarizes digital payments made to businesses over the year. It’s considered an “information return” and is sent to merchants at the end of the year. Form 1099-K includes a summary of all the credit, debit, and digital payments received through a point-of-sale provider like Stripe, Square, or PayPal.
The Internal Revenue Service decided to delay the new 1099-K changes in late 2022, meaning that Americans accepting business payments on peer-to-peer apps would no longer receive the new form in their mailbox for the 2022 tax year.
Instead, the existing 1099-K reporting threshold of $20,000 in payments from over 200 transactions will remain in effect for the 2022 tax year. Small business owners and individuals using these apps for business transactions have another year to prepare for the new tax form they’ll receive in early 2024.
Despite the fact that the initial policy change was announced in early 2021 via the American Rescue Plan Act of 2021, as the 2022 tax season rolled around there remained widespread confusion regarding these changes, as well as how freelancers and solopreneurs should treat the new form in their inbox. As a result, the IRS decided to delay the new 1099-K filing requirement until 2023 and outlined that the calendar year 2022 will be a transition period for implementing the lowered threshold reporting.
Historically, the 1099-K threshold has been over $20,000 and hundreds of transactions. However, the change to the tax law means that people who accept more than $600 in payments for goods and services on a payment app, even if it’s in a single transaction, or process more than $600 of payments, can expect to receive a 1099-K.
Although this threshold was expected to kick in in 2022, the IRS delayed the changes in December 2022. As a result, the lower threshold required for a payment app to generate a 1099-K will apply to the 2023 tax year, to be paid in spring 2024.
So, if you conduct a business transaction on a payment app or peer-to-peer payment app in 2023, you should expect to receive the new form in your mailbox.
Form 1099-K is informational, meaning it helps you and the IRS understand how much money you made from digital payments. If you receive it, you only need to pay taxes on the portion of the 1099-K which constitutes income. Income is any money from you producing goods or services for somebody. Self-employed individuals must report business income on a Schedule C come tax time, but you can use common business expenses to reduce your tax liability.
This answer depends on how many peer-to-peer payment apps you have a business profile on.
Many merchants are used to receiving several 1099-Ks come tax time, especially if they use one or many platforms like Square, Stripe, and PayPal. The case will be no different for freelancers and solopreneurs—you’ll get a 1099-K for each payment app on which you accept business payments. But remember, you only need to pay taxes when your business use of those apps exceeds the $600 threshold.
A 1099-K summarizes all the transactions that a business accepts through a platform—Venmo, Cash App, Stripe, Square—throughout the year.
That means that the reportable figure on your 1099-K could be close to your actual income from the platform, but you likely will not owe taxes on 100% of that income. You can deduct many business expenses from your tax bill, including fees, refunds, chargebacks, or other costs. To make life easier, keep records of your transactions in a central place—generate invoices to send to clients, make a note of platform and payment fees from platforms in a bookkeeping software, and write down any chargebacks or refunds.
Always remember: if you are producing goods for people, the costs of supplies that are used to create products is a business expense that you can deduct from your taxes owed. You’ll want to keep track of any expenses you incur in the process of delivering your goods or services; it will help you later. Here are a few of the most common deductions available to freelancers and the self-employed.
If that feels complex, consider consulting a tax professional for help.
You’d have to make no money to avoid paying taxes. Any income you earn is reportable to the Internal Revenue Service (IRS), regardless of the source.
In any case, you might receive a 1099-K if you even conduct a single business transaction on peer-to-peer apps, but you’ll undoubtedly receive one if the total value of your transactions exceeds $600.
Even if you stop accepting Venmo or Cash App, you’ll have to consider—what alternative would you use?
You could accept credit card payments using an app like Stripe or Square, but you’d still receive a 1099-K at the end of the year—and pay the fees that come with accepting debit or credit card transactions.
You could do away with the 1099-K pains by accepting only wire transfers, direct bank transfers, cash, or checks, but you might lose customers if your payment options are not flexible. And if your goal in making these changes is to avoid paying taxes, you’ll likely be disappointed to hear that it won’t work.
The IRS’s changes to the 1099-K reporting rule underlie a reality you should learn sooner rather than later: you will always pay taxes on your income. Regardless of whether or not your transactions leave a paper trail, you should file any tax forms you receive and pay the appropriate amount to avoid audits and penalties.
Paying your taxes is not just a matter of legality, either. Your eligibility for social security benefits, unemployment, and other government benefits is contingent upon paying applicable federal and state taxes.
Instead of avoiding taxes, try to minimize your tax liability. You can do this by keeping track of reasonable expenses while operating your business. These expenses can be written down against your business income at the end of the year, but you’ll need solid recordkeeping to pull this off. There are some business expenses you might not be thinking about—like software, phone bills, marketing, or even costs related to your vehicle.
The 1099-K changes will have virtually no impact on your taxes unless you were hiding your income and avoiding paying taxes before this year. There should be no reason to throw away payment apps.
Zelle is a unique outlier to the 1099-K rule—it won’t send you one. That’s because Zelle manages automated clearinghouse (ACH) transactions, which are direct bank transfers. As a result, they are not considered a traditional peer-to-peer payment app.
This is also why it has been used to circumvent the new 1099-K rules. However, any income you make via Zelle needs to be reported. So, just because Zelle won’t prepare you a 1099-K doesn’t mean you can skirt paying taxes on the income you made. The fact that it won’t prepare and send you a 1099-K might actually be a reason that many self-employed individuals choose not to use it, since this means that you’ll need to prepare all the tax paperwork yourself.
The best time to prepare for tax season is right now—whether you’re just sitting down to file your taxes for last year, taking score of your business’s income, or trying new software to make life easier.
However, generally speaking, there are three things you can start doing now to make your life easier for the 2023 tax season:
Separate business expenses from personal expenses.
Keep accurate records of all income and expenses throughout the year, including receipts, invoices, and bank statements.
Regularly review your business expenses to look for deductions.
Set aside money for taxes.
Stay on top of your quarterly estimated taxes.
The IRS’s decision to push back the 1099-K to the 2023 tax year allows self-employed people to breathe a sigh of relief—but the form will inevitably be back. Establish an effective way to track your business income and expenses throughout the year now so there are no surprises come tax time.
With smart business banking and powerful, easy-to-use financial tools, we help people seamlessly run their own businesses. We believe in doing what you love—which probably isn’t paperwork.
This material has been prepared for informational purposes only.
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