Getting Paid Through PayPal, Venmo or Cash App? The IRS Wants to Know About It

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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:

Money received from a family member as a holiday or birthday gift
Money received from a friend covering their portion of a restaurant bill
Money received from your roommate or partner for their share of the rent and utilities

Payments that will be reported on a 1099-K must be flagged as payments for goods or services from the vendor. When you select "sending money to family or friends," it won't appear on your tax form. In other words, that money from your roommate for her half of the restaurant bill is safe.

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.

To avoid any reporting confusion, make sure you're tracking your earnings manually or with accounting software such as Quickbooks.