Third-Party Payment Apps Under IRS Scrutiny

Once considered convenient tools for splitting dinner tabs or getting paid for side gigs, apps like PayPal, Venmo, Cash App, and Stripe are now in the IRS’s spotlight. Thanks to recent updates to federal tax law, the way these platforms report your income is changing fast.

If you’re a small business owner, freelancer, or even someone with a growing side hustle, understanding the new 1099-K reporting rules is more than smart; it’s essential.

The $20,000 Days Are Over

Until recently, most people never saw a 1099-K. That’s because the threshold for payment apps to report earnings was high: more than $20,000 in payments and over 200 transactions per year. For casual sellers or part-time freelancers, it simply didn’t apply.

But all of that is changing. Congress significantly lowered the bar to increase tax compliance and transparency in the gig economy.

Instead of a sharp drop to $600 (as originally planned), the IRS is phasing in the new rules over several years to give taxpayers and platforms more time to adjust:

• In 2024, payment platforms will send a 1099-K if you receive $5,000 or more in business-related payments.
• In 2025, that number drops to $2,500.
• By 2026, barring any changes, the final threshold will land at $600, with no transaction minimum required.

Not Every Payment Is Taxable

One of the biggest sources of confusion is the difference between what gets reported and what actually gets taxed.

Here’s the key distinction: Form 1099-K is only meant to report payments received for goods or services, including freelance income, online product sales, gig work, and business transactions.

So if you received $3,000 for graphic design work via PayPal in 2025, and that payment crossed the $2,500 threshold for the year, you’ll get a 1099-K, and so will the IRS.

But if your roommate Venmoed you $800 for their share of the rent, that’s not taxable income. The same goes for gifts, reimbursements, or selling your used couch for less than you paid. These personal transactions aren’t taxable, but they might accidentally show up on a 1099-K if you use the same account for everything.

That’s where problems start, especially if the IRS thinks you’ve underreported income just because your form includes amounts that weren’t taxable.

Side Hustles, Big Scrutiny

Lower thresholds mean a much larger pool of people will receive 1099-K forms, many for the first time. Freelancers earning just a few thousand dollars, part-time online sellers, and even people with occasional gigs are suddenly in the reporting zone.

Here’s the challenge: once the IRS gets a 1099-K with your name and tax ID, they’ll expect that income to appear on your return. If it doesn’t, you could get a notice or audit trigger.

Someone making $3,000 in side income might have been under the radar in the past. In 2025, that same person will be squarely on the radar.

The message is clear: every dollar counts, and the IRS now gets digital receipts.

One App, Two Uses

With the IRS requiring more third-party payment platforms to report income through Form 1099-K, using a single app for personal and business transactions can lead to major confusion.

Imagine you’re selling handmade products through Venmo but also using that same account to split rent or reimburse friends. Those personal payments could be mistakenly included in your reported income if they aren’t clearly labeled.

That kind of mix-up can lead to an inflated 1099-K and unwanted attention from the IRS. To prevent this, take a few simple steps now:

1. Use separate accounts or profiles for business and personal payments whenever possible.
2. Clearly tag transactions within the app (e.g., “goods and services” vs “friends and family”) to keep categories distinct.
3. Avoid mixing business and casual transfers in the same app or payment stream.
4. Review incoming payments regularly to catch any misclassified transactions before tax season.
5. Choose one platform for business income and another for personal use.

Know What You’re Being Reported For

Another complication: Form 1099-K reports the gross payment amount received, not your actual profits.

That includes credit card fees, processing charges, shipping costs, and even customer refunds. If you receive $10,000 in payments but spend $3,000 fulfilling orders, your 1099-K will still show the full $10,000.

It’s up to you to track and report the difference. That’s why keeping good records of expenses, receipts, and platform fees is more important than ever. The IRS only sees the top-line number, but you can deduct legitimate business costs.

Just be ready to back it all up.

What to Do If You Receive a 1099-K

First, don’t panic. Getting a 1099-K doesn’t mean you’ve done anything wrong; it just means your earnings crossed a threshold and the IRS was notified.

Here’s what to do:

• Review it carefully. Make sure the number matches your records and doesn’t include personal payments.
• Report your income. If the payments were for goods or services, you must report them on a 1099-K or not.
• Document everything. If part of your 1099-K includes non-taxable transactions (like a used item sold at a loss), keep proof of your purchase price and note the difference when filing.

The IRS Isn’t Waiting Anymore, And Neither Should You

With enforcement ramping up and thresholds dropping, it’s safe to say this is just the beginning. The IRS is getting serious about tracking digital payments; casual earners are now part of that picture.

Whether you’re a full-time entrepreneur or just testing the waters with a weekend side hustle, this is the time to get your payment processes and tax strategy in order.

If you’re unsure how the new 1099-K rules apply to your situation, or if you’ve already received a form and don’t know what to do with it, Todd S. Unger, Esq. LLC is here to help.

We work with small business owners, freelancers, and independent contractors nationwide to stay compliant, reduce risk, and confidently respond to IRS challenges.

Contact us for a confidential consultation.