Do you use PayPal, eBay, Etsy, Venmo, or Cash App? If you’re like most individuals, the answer is likely “yes.” The convenience of these platforms has made them extremely popular. Peer-to-peer payment services let you use a bank account or a credit or debit card to pay friends or family from your phone. Paying for your half of the pizza just got a lot easier!
In 2000, PayPal’s vision was “to create the world’s first digital payment platform, making money work better, faster and easier than ever.” And, boy, has it worked. In 2024, there were 2781 million PayPal users in the United States. The platform is also used abroad.
2025 brings big changes for PayPal and the other types of Peer-to-Peer platforms, most notably issuance of 1099-K forms to any users who gain income of $2,500 or more. The IRS had originally planned to lower the reporting threshold to $600 in 2023, but decided to introduce a gradual approach, lowering it each year. By 2026, the threshold will be a mere $600!
Threshold of Earnings Reported via 1099-K Forms from Digital Platforms by Year:
- 2024: $5000
- 2025: $2,500
- 2026: $600
If you’re a freelancer and using a peer-to-peer platform to not only accept income from your various contract/freelance jobs but also using the same platform to accept payments from friends for movie tickets, pizzas, teacher gifts, you name it, your record keeping just got more complicated. You will need to record “non-freelance or gig income” expenses as “personal” so you can accurately report your taxable income. Or, better yet, use one platform for freelance payments, and another one for personal payments.
A 1099-K is not the same as a W-2. A W-2 reports income paid to employees, while the 1099-K is a form issued to freelancers or gig workers.
Any of these online networks is required to file and send a 1099-K if it transfers at least $2,500 to you during 2025. The $5,000 threshold is an aggregate, meaning that even if different people send you small amounts of money through, say, PayPal, throughout the year, you’ll get a 1099-K from PayPal if those payments add up to at least $5,000.
Roughly 16% of Americans have completed a job via an online gig platform. Data shows that the global gig economy now accounts for up to 12% of the labor market. More than one-third of the U.S. workforce is now engaged in some form of gig work, projected to rise to half in 2025.
These platforms aligning with IRS regulations is a pivotal shift, signifying higher visibility of these types of earnings to governmental agencies with a “paper trail,” which is, of course, really a digital trail for such transactions.
Streamlining Processes
Maybe you’re a freelancer or gig economy worker who meticulously reported all your income received on these platforms. If so, this will be a welcome change because your self-reporting tasks just went away.
On the other hand, if you underreported, or conveniently forgot to account for some or all of this income in years past, this streamlined approach by the platforms will ensure everything is accurately recapped via the 1099-K, so individuals and businesses may see an increase in their taxable income with proper documentation now available to both the taxpayer and the IRS.
Ensuring Compliance
From a regulatory standpoint, this transition is a strategic move toward reducing the tax gap. By ensuring more transparent income reporting processes, the IRS can minimize instances of past underreporting or individuals who do not report any such income. This level of oversight not only improves compliance but also ensures a more equitable tax system, where individuals and businesses alike contribute appropriately based on their earnings.
Make Sure You’re Familiar with Components of Digital Transactions
This new initiative raises awareness of the increasing need for financial literacy, particularly around how digital transactions work with regard to taxation. It’s important that users stay more informed about how digital earnings are tracked, reported, and taxed. Many educational programs and platforms are likely to emerge, focusing on increasing awareness and understanding of these financial responsibilities.
What About Privacy?
While transparency and compliance are crucial aspects, privacy concerns emerge when financial platforms automatically provide detailed reports to tax agencies. Users may worry about how their financial data is handled and protected, advocating for stricter data protection measures to ensure personal and financial information is kept secure.
Impact on the Economy
For the broader economy, this shift could lead to increased tax revenue, which can then be channeled into public goods and services. However, the use of such platforms may decrease in popularity because stricter tax oversight might lead individuals to choose other forms of payment instead of a digital payment platform.
What About Bank-to-Bank Platforms Like Zelle?
According to Nerd Wallet, it’s true that tax reporting rules governing other payment services don’t apply to Zelle, but the actual rules about how income is taxed are the same regardless of how you receive the money. Remember: just because Zelle isn’t required to send a 1099-K, that doesn’t mean you don’t have to pay taxes on your business income. You still must report all taxable income you made, including income from Zelle, on your tax return.
The law doesn’t allow you to avoid taxes just because you don’t get a tax form.
Think of income from Zelle like a payment in cash. It might be harder for the IRS to find out about such payments. But if federal agents determine that you deliberately concealed taxable income — say through an audit that looks at other business records — you could be in line for serious legal headaches.
“If payments you receive on the Zelle Network are taxable, it is your responsibility to report them to the IRS,” Zelle says on its website.
In comparison:
- Zelle doesn’t allow users to hold a balance, while PayPal does.
- Zelle doesn’t allow users to connect a credit card, while PayPal does.
- PayPal has higher transfer limits than Zelle.
- PayPal offers buyer protection, while Zelle doesn’t.
In conclusion, the overall landscape of digital finance will, no doubt, be redefined as a result of the introduction of 1099-Ks by peer-to-peer platforms like Venmo and PayPal. This change marks a significant development in the regulation of the freelancer/contract/gig economy. While offering benefits of transparency and compliance, this change requires adaptations in personal financial management and an increased awareness of taxation responsibilities.
