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If you happen to promote gadgets on-line or use third-party cost apps comparable to Venmo® or Money App®, you’ve most likely heard about new IRS reporting thresholds that had been supposed to enter impact first in 2022, after which in tax yr 2023.
These threshold modifications understandably prompted a lot confusion amongst filers. Because of this, the Inner Income Service (IRS) has postponed the 1099-Ok threshold change as soon as once more and introduced a brand new threshold change set to enter impact in 2024.
To assist hold sellers knowledgeable within the meantime, this text will make it easier to perceive these tax modifications and what they may imply for the tax returns you’ll file for the approaching tax years.
Recap of the 1099-Ok reporting threshold modifications
For tax yr 2023, on-line cost platforms are solely required to report transactions to the IRS when you hit an annual threshold of $20,000 in gross funds and at the very least 200 transactions. The IRS confirmed these thresholds will stay in place for 2023.
Starting Jan. 1, 2024, these thresholds will drop considerably. With the change, cost platforms (like PayPal®, Sq.®, Venmo, and so on.) should report funds totaling $5,000 or extra in a calendar yr, with no transaction minimal. That is a part of a phase-in course of by the IRS to ultimately implement the $600 threshold initially caused by the American Rescue Plan. Because it stands, the edge is anticipated to drop once more to $600 for tax yr 2025, except the IRS makes extra modifications.
If you happen to meet the relevant threshold, you’ll obtain Type 1099-Ok from a cost app or on-line market. That is an informational tax doc detailing the gross quantity of all of your reportable transactions.
Type 1099-Ok incessantly requested questions
Why is the reporting threshold for Type 1099-Ok altering?
The American Rescue Plan handed in 2021 included a provision that launched a brand new reporting threshold for Type 1099-Ok. In the course of the pandemic, many individuals began aspect hustles to earn extra cash whereas being caught at residence. Because the gig financial system continues to develop, the brand new decrease thresholds are designed to cut back the cases of unreported and underreported taxable earnings from people and small companies.
Will I must pay tax on my transactions if I solely use cost apps for private funds?
The brand new 1099-Ok reporting necessities will solely impression people who’ve made a revenue by promoting items and providers whereas receiving compensation by means of cost card transactions (debit or bank card) or through the use of third-party cost networks comparable to PayPal or comparable apps.
If you happen to solely use cost apps for private transactions between household and associates—like splitting the hire or sharing bills throughout an evening out — then you definately don’t have to fret about it. This isn’t a brand new tax on all transactions made by means of these apps, it’s merely a report of all of your transactions, taxable or not. Some apps supply a “family and friends” class that helps keep away from flagging private transactions as enterprise funds.
Will I get a 1099-Ok if I promote gadgets through on-line marketplaces?
In case your transactions totaled $20,000 or extra and also you had at the very least 200 transactions by means of a web-based market, you’ll obtain Type 1099-Ok for tax yr 2023. In 2024, you’ll obtain Type 1099-Ok you probably have any variety of transactions that totaled $5,000 or extra.
That being mentioned, you solely must pay taxes on any earnings you make. If, for instance, you obtain a brand new lawnmower for $1,000 a number of years in the past and also you offered it on-line for $500 this yr, you received’t must pay any earnings tax on the sale.
Presents, reimbursement, and promoting private gadgets at a loss are excluded from earnings taxes. So, if you happen to solely use cost apps or on-line marketplaces for these causes, you don’t want to fret about reporting these in your tax return.
What occurs if a cost app sends me a 1099-Ok for a nontaxable transaction?
Although private transactions between family and friends don’t should be reported, you might obtain a 1099-Ok from a cost service app for nontaxable transactions. Since that is simply an informational doc, it doesn’t should be included together with your tax return.
Self-employed individuals can also discover they don’t want their 1099-Ok. Freelancers who use these apps as cost processors, for instance, would possibly get a 1099-Ok from the cost app in addition to a 1099-NEC from their consumer for a similar transaction. On this case, you received’t must report the earnings twice.
The IRS leaves it as much as you, the taxpayer, to find out which funds are taxable and which aren’t. Typically, you’ll solely owe earnings tax if you happen to made a revenue on the transaction, like promoting a private merchandise for a achieve. To restrict the potential for incorrect tax reporting, all the time ensure that to hold your private and enterprise transactions separate on cost apps and don’t settle for any nontaxable funds through debit or bank cards when attainable.
If you wish to learn up on this difficulty additional, try this useful 1099-Ok FAQ web page from the IRS.
Will this enhance my taxes?
If you happen to’ve been reporting your taxable earnings accurately, this alteration mustn’t enhance your taxes. The tax legal guidelines haven’t modified — solely the reporting necessities. Earnings made in alternate for items and providers has all the time been taxable. Now, there’s only a bit extra paperwork concerned.
Nevertheless, if you happen to’re new to the gig financial system otherwise you haven’t been reporting earnings accurately up to now, it is perhaps a good suggestion to crunch some numbers and determine how your taxes could possibly be affected within the coming years. If you happen to’re promoting gadgets for a revenue, our capital positive factors tax calculator is perhaps of assist.
How do I report my 1099-Ok transactions on my tax return?
If you happen to solely offered private gadgets or made interest earnings, you must report that earnings on Schedule D or Schedule 1, respectively. It’s also possible to try Easy methods to File a 1099-Ok on TaxAct for extra detailed and product-specific info.
In case you are self-employed or run a enterprise, you must report your 1099-Ok enterprise funds as you’d sometimes report your corporation earnings. Relying in your enterprise construction, you must use Schedule C or Kinds 1120, 1120-S, or 1065.
How cost app customers and on-line sellers can put together for tax season
Nonetheless not sure methods to put together for these modifications? Listed here are three key steps that will help you precisely file your earnings tax return for the approaching tax years:
1. Follow good bookkeeping.
It doesn’t matter if you happen to offered one merchandise for revenue or operated as a small enterprise — retaining detailed information is crucial for tax functions.
The very best factor you are able to do is save your receipts and hold organized paperwork of your transactions on each cost app you employ. If you happen to’re promoting for enterprise functions, a few of the most essential information to maintain monitor of are your price of products offered (often what you initially paid for the merchandise you’re promoting), transport prices, charges, and any bills for packing and transport provides. Make sure you hold monitor of any refunds paid to clients as properly.
Monitoring this info will make it easier to decide your taxable earnings and stop you from overreporting earnings which can lead to an overpayment of earnings tax. Bills like transport and provide prices are usually deductible enterprise bills, so hold monitor of every merchandise’s price foundation and the ultimate sale worth to find out the price of items offered. It’s additionally a good suggestion to take images of the gadgets you offered and place them together with your information.
Organized, detailed information will assist streamline your earnings tax return whether or not you file on paper or use a web-based tax submitting software program like TaxAct®.
Tax Tip: How lengthy must you maintain onto receipts? The IRS can sometimes audit tax returns filed inside the final three years, as long as there may be not a considerable error. Due to this, it’s endorsed that you just hold receipts and different supporting paperwork for at the very least three years after submitting your return or till the statute of limitations expires. This will range relying on whenever you filed (or didn’t file) — if you happen to’re not sure, it’s most likely greatest to carry onto the receipts and seek the advice of a tax skilled.
2. Make certain the cost platform has your TIN (SSN, EIN, or ITIN) on file.
Whenever you registered to your cost platform account, you might not have supplied your full TIN, which could be your SSN, EIN, or ITIN. When you attain the sale threshold — $20,000 and over 200 transactions for 2023 or $5,000 in 2024 — the cost platform will ask you to supply your TIN to adjust to IRS reporting necessities.
Make certain to substantiate that the data you present to the third-party platform is correct and matches what the IRS has on file for you or your corporation. If the TIN you present doesn’t match IRS information, the cost platform would require that you just add a W-9 to right your TIN. Within the absence of a legitimate TIN, the IRS requires third-party cost platforms to withhold 24% of your gross proceeds as backup withholding. If this occurs, you might obtain a Type 1099-Ok even if you happen to didn’t hit the federal reporting threshold.
3. Know methods to use your Type 1099-Ok.
The Type 1099-Ok you’ll obtain is an informational doc designed that will help you file your earnings tax return.
When submitting, it’s best follow to check Type 1099-Ok towards your private information to make sure all of your transactions are accounted for. The quantities reported in your Type 1099-Ok are gross proceeds, not essentially earnings. To find out the earnings related to every transaction, you will want to find out the fee foundation of the merchandise(s) offered.
It’s additionally essential to notice that transactions included in your Type 1099-Ok are based mostly on the transaction settlement date, not the sale date. For instance, if you happen to offered an merchandise on Dec. 31, 2023, however the funds didn’t settle till Jan. 2, 2024, that transaction would present up in your Type 1099-Ok for 2024 as a substitute.
The way you report your 1099-Ok earnings is determined by what you promote and whether or not you run a enterprise. In case you are a sole proprietor, you’ll report your corporation earnings utilizing Schedule C. In case you are a client promoting capital belongings or promoting as a interest, you’ll report any earnings and losses utilizing both Schedule D or Schedule 1.
If that is beginning to sound like quite a bit, don’t panic. Reporting earnings out of your 1099-Ok as a first-timer shouldn’t be practically as daunting because it sounds. If you happen to select to file with TaxAct, our intuitive tax prep software program will ask questions on gadgets you offered and pull all the mandatory tax types so that you can file.
The underside line
There’s no must stress about your upcoming taxes. Consider the Type 1099-Ok you obtain as a information designed that will help you decide your taxable earnings. Hold good information, perceive that solely earnings are taxable, and confirm that the third-party platform has your TIN to forestall delays or problems together with your on-line gross sales.
By following these important steps, you’ll be setting your self as much as file your federal earnings tax return with confidence.