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This story is part of, CNET’s coverage of the best tax software and everything else you need to get your return filed quickly, accurately and on-time.
If you started aor this year, you may have received payments through . If so, the IRS will know about it.
Self-employed individuals are always required to report their earnings when filing their tax returns, but a new regulation for 2022 requires digital payment apps to report your earnings over $600 directly to the IRS via tax form 1099-K. You’ll then receive a copy of your 1099-K in late January or February.
What exactly does this new rule mean for your taxes? We’ll walk you through what’s changed and debunk a few myths along the way.
First, this isn’t a tax change, it’s a reporting change
If you’re, you should already be paying taxes on your total income, regardless of how you receive your payments for goods and services. The new legislation is not a tax change: It’s a tax reporting change so the IRS can keep tabs on transactions made through payment apps that often go unreported.
Prior to this legislation, third-party payment platforms would only report to the tax agency if a user had more than 200 commercial transactions and made more than $20,000 in payments over the course of a year.
Going forward, third-party payment companies will issue you a 1099-K tax form each year if you earn $600 or more annually in income for goods or services. This tax form might include taxable and nontaxable transactions, particularly if the account is for both business and personal use.
To make managing your business finances easier, we recommend creating separate PayPal, Zelle, Cash App or Venmo accounts for your professional transactions.
Payment apps may request tax information from you
Now that this new law is in effect, payment apps like PayPal may reach out to you to confirm 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 or individual freelance or gig worker, you’ll provide an ITIN or SSN.
A 1099-K could make filing your taxes even easier
Here’s some good news — receiving a 1099-K can take some of the manual work out of filing your self-employment taxes. Previously, self-employed individuals would receive 1099-MISC or 1099-NEC tax forms from each individual client they worked for, when they earned more than $600.
Now, you may still receive individual 1099-NEC forms if you were paid through direct deposit, check or cash, but your 1099-K will include payments from all clients who paid you through that particular payment app. So, if you had five clients in 2022, and one paid via direct deposit, while the other four paid you through PayPal, you should receive two tax forms, instead of five. You’d get one 1099-NEC for the direct-deposit client and one 1099-K from PayPal for the other four clients’ payments.
This can save you from spending your time tracking down paperwork and adding up third-party payments.
Items sold for a profit on Facebook Marketplace will be taxed, but personal belongings sold at a loss won’t be
If you sell personal items for less than you paid for them and collect the money via third-party payment apps, this new legislation 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. That’s because it’s a personal item you’ve sold at a loss. However, you may be required to show documentation of the original purchase to prove that you sold the item at a loss.
But, if you have a side hustle where you buy items and resell them for a profit via PayPal or, then earnings over $600 will be considered taxable and reported to the IRS.
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.
The IRS isn’t taxing money you send to family and friends
Rumors have circulated that the IRS was cracking down on money sent through third-party payment apps to family and friends, 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 your 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 show up on your tax form. So that money from your roommate for her half of the restaurant bill is safe.
If you do receive a 1099-K for money that was sent from a family member or friend, reach out to the payment processing company to get this transaction corrected.