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New Tax Rule Targets Gig Workers

If you get payments through an app, the IRS will probably know about it

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Freelancers, gig workers and people selling items on sites like Etsy and eBay may get a 1099-K tax form next year if they receive payments via apps such as Venmo, PayPal, Zelle or Cash App. The Form 1099-K will be sent to many more taxpayers for the 2023 tax year because of a change that substantially lowers the threshold for who must receive the form.

The new rule requires third-party settlement organizations such as PayPal and Venmo to report business transactions to the IRS and you on a Form 1099-K, “Payment Card and Third Party Network Transactions,” if transactions total more than $600 during the year; even one transaction exceeding $600 can trigger the reporting requirement. The old threshold was significantly higher, at 200 transactions annually that exceeded a total of $20,000. The American Rescue Plan of 2021 is responsible for the change.

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The 1099-K reports various business transactions, including income from a business the taxpayer owns, self-employment, activities in the gig economy and the sale of personal items and assets.

The tax man’s coming

What hasn’t changed: the requirement to report income earned through these apps. But the reality is, many people probably weren’t reporting the money they made via these apps if it was below $20,000. Now, for example, if you sell more than $600 in crafts on Etsy throughout the year and get paid through a cash app, the IRS will be notified through a 1099-K sent by the app. You also would receive a 1099-K, likely in January 2024.

“​​The amount of paperwork that's going to fly from these companies to all the millions of people that do this is going to be astronomical,” said Glenn Harper, owner of Harper & Company CPAs in Columbus, Ohio. “Is it an accounting nightmare for people? Yeah, because nobody reported this income before. They just thought it was free; everybody was cheating. Now it's going to make you have to record it, because now the IRS is going to get this form that says, ‘Hey, you made this money.’”​

Same thing applies to selling secondhand items on eBay, noted Jennifer Galstad-Lee, a senior manager in the tax group at GRF CPAs & Advisors in Bethesda, Maryland. She gave the example of someone who sells an antique on eBay for $700 and is paid through a cash app, which would require the app to file a 1099-K because the amount is above $600. If the seller originally bought the item for $500, he or she would be responsible for paying tax on a $200 gain (a loss is not deductible). If the seller does not have adequate support to document the original purchase price, he or she could be on the hook for paying tax on the full $700, Galstad-Lee said.​

It can be harder to track the cost basis if the seller does many small transactions, she added.

“When they do small-dollar-amount sales, and it's a side gig, it becomes more difficult to show the basis,” she said. “For the general public, who are not in the business and just happen to do small sales here and there, and they suddenly receive something like this, I think it can add more difficulty on them."

The IRS says the law is not intended to track personal transactions such as sharing the cost of a car ride or meal, birthday or holiday gifts, or paying a family member or another for a household bill.

Unintended consequences?

But accountants are worried about unintended consequences, such as what happens with reimbursements between friends made on cash apps.

Let’s say you bought two tickets to a Taylor Swift concert, costing $800 each. Your friend reimburses you $800 for her ticket and sends you the payment via Venmo. Bingo — you’ve just exceeded the $600 threshold for transactions to generate a 1099-K form, and Venmo could be sending a 1099-K form to the IRS. In this case, you need to be prepared to report $800 as income on your tax return and $800 as an offsetting expense, and be sure to retain a record of the ticket purchase as backup, Harper said.​

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“So the IRS by default, they don't know whether that was a reimbursement, if it was for goods and services. They don't know, so you have to report it. It's up to you to report it the proper way,” Harper said.​

IRS spokesman Eric Smith said he could not speculate on a situation like this and what the reporting guidelines might be when people file a 2023 tax return next year.

“We have been meeting with, and soliciting input from, interested stakeholder groups and that consultation process will influence what reporting guidelines will look like on next year’s return,” Smith wrote in an email. He added: “It’s possible that our guidelines may evolve or be refined as the year goes by, based on public input and other factors, but at this point, this is what they are.”​

Smith pointed to IRS guidance about 1099-K forms that states, “Money received as a gift or for reimbursement does not require a Form 1099-K. Taxpayers can minimize the chance of receiving one of these forms in error by asking friends or family members to correctly designate those types of electronic payments as a non-business-related transaction when possible.”​

Now let’s assume your friend can’t go to the concert. You sell her $800 ticket through Zelle for $900, snagging a $100 profit. Under the new rules, Zelle could send a 1099-K to the IRS, and you need to maintain records for your original purchase and the resale so you can show the IRS you made only $100 gain on the resale — which you must report — but not a $900 gain. If you sell the ticket for $700 and lose $100, you can’t deduct the loss, but still need to maintain records of the purchase and resale to demonstrate you did not make $700 income, Harper said.​

“Under long-standing tax law, profits from the sale of personal items are usually reportable and taxed, using favorable capital-gains rates,” Smith said”Unlike investors, losses are not deductible and can’t be netted against gains.

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Keep good records

For freelancers, and anyone selling items online, it is crucial to maintain meticulous records and keep a ledger of every transaction made on payment apps.​ ​— “Everybody needs to become an accountant,” Harper said. “If you're buying, selling, trading, reimbursing, engaged in commerce, you should really look at Venmo, PayPal and Zelle as just like your bank account, and you should be tracking the money in and out.”​

Galstad-Lee recommends using an accounting system software, noting many can be inexpensive.

“At year-end, you don't have to put those things in Excel or add up the numbers on your calculator,” she said. “If you have a system that captures all of those things in one place, that makes your life a little bit easier.”​

Also, try to use one payment app to help make record-keeping more manageable, Harper advised. But if you are a freelancer or gig worker, you will likely be paid through whichever method or app each of your clients prefers, he said.​

In January, taxpayers should check that third-party payment processors did not make mistakes on their 1099-K forms — another reason to maintain good records, Galstad-Lee said. If the amounts reported on the 1099-K are higher than what was received, the payee is responsible for getting the form corrected and must ask the issuer to fix the error.​

The new rule was supposed to take effect for the 2022 tax year. But in December, the IRS announced it was delaying implementation of the new $600 reporting threshold, pushing it to the 2023 tax year. The IRS said the delay would help reduce confusion as people filed their 2022 taxes and give taxpayers more time to prepare and understand the new reporting requirements.​

“The change under the law is hugely important because tax compliance is higher when amounts are subject to information reporting, like the Form 1099-K,” the IRS said in a press release in December. “However, the IRS noted it must be managed carefully to help ensure that 1099-Ks are only issued to taxpayers who should receive them. In addition, it's important that taxpayers understand what to do as a result of this reporting, and tax preparers and software providers have the information they need to assist taxpayers.”​

The bottom line during this calendar year is to be aware of this change and to track your transactions throughout the year to avoid trouble.​

“Everybody was under the illusion that nobody was watching, and now they're watching,” Harper said. “It's a lot easier to track it as you go than trying to recreate it a year, two years later, when the IRS is on you. And remember, you don't want to be that person where you're not reporting and doing your taxes properly because it's just not worth it.”

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