Digital Payments and Taxes: What You Need to Know Before You File
In an unexpected turn of events, the IRS announced another delay in the implementation of the new reporting rule that would require third-party payment apps, for example, Zelle, PayPal, Cash App, or Venmo, to report earned income over $600 per year to the IRS on form 1099-K.
Initially set to go live in 2022, this rule continues to hang in limbo for a second year as the IRS has determined that additional time is needed to implement the new reporting requirements adequately. Here’s what taxpayers who earned money through a payment platform in 2023 should expect when filing taxes.
HOW DOES THE IRS 1099-K CHANGE IMPACT YOUR 2023 TAX RETURN?
For 2023 and prior years, payment apps and online marketplaces are only required to send out Forms 1099-K to taxpayers who receive over $20,000 and have over 200 transactions.
HOW IS YOUR 2024 AFFECTED BY THE IRS 1099-K RULE?
If you earn over $5,000 from a business or side hustle and receive payment through any third-party payment apps, you will receive tax form 1099-K to file in 2025. As of now, this number could still change.
IS MONEY OWED FOR EVERYTHING THAT YOU SELL?
If you sell a personal item like a table for less than you paid, you won’t owe taxes on the sale because it is a personal item and was sold at a loss. However, you may be required to show documentation of the original purchase to show that you truly sold the item at a loss.
TIPS ON FILING TAXES ON MONEY EARNED THROUGH A PAYMENT APP/PLATFORM
·Keep all identification numbers accessible
If you own a business, you generally have an employer identification number (EIN). If you are a sole proprietor, gig worker, or freelancer, you will have to provide a Social Security Number (SSN) or individual tax identification number (ITIN). It is helpful always to keep your identification numbers accessible.
·Set up a business bank account
If you receive business income, it may be beneficial to establish a business bank account. Doing so lets you keep your business and personal transactions separate and makes managing responsibilities like filing taxes easier.
·Stay informed
With the IRS again delaying the proposed changes to Form 1099-K, it is important to stay current on information relevant to your situation, for example, when Form 1099-K becomes effective and the details within it, whether or not they have changed since this new postponement. Tax rules are regularly being modified, and being aware of any alterations can help mitigate the risk of filing an inaccurate return that ends up having to be amended later on.
·Maintain records
Maintaining accurate records of your inventory, sales, and business activities is essential to file your 1099-K accurately, and in the event of a sale, you may be able to avoid having to pay taxes on nontaxable income.
CONSULT YOUR FINANCIAL PROFESSIONAL
Tax filing season can be not only stressful, but it can also be complex. As the new tax regulations are implemented, they may impact your financial strategy and you may consider reviewing your financial goals to determine if they should be modified. This process can be tedious and trying to figure out how the new rules will affect you could be difficult to calculate on your own. Consider consulting a financial professional so you can learn how to make these new regulations work for you and your financial aspirations.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Sources:
IRS Delays 1099-K: What PayPal, Venmo and Cash App Users Need to Know for Tax Season - CNET
This article was prepared by LPL Marketing Solutions
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