The IRS is now watching those who are self-employed, those who are independent contractors or, even those who just operate a side business, and use payment apps like Venmo, Paypal or Cashapp. Because of a new tax reporting regulation that took effect on January 1, 2022, most payment apps are now required to issue 1099-K’s to any businesses receiving more than a total of $600 in electronic payments over the course of the calendar year. Previously, this would be necessary only if the business received more than $20,000 and conducted 200 or more commercial electronic transactions in one year. This is a huge difference.
This new rule does not impose any new taxes on businesses that use payment apps and does not apply to 2021 taxes. It’s nevertheless a wake-up call to businesses that thought if they were receiving money for selling goods or services through payment apps, they didn’t have to report it on their tax returns or they otherwise thought they could fly under the fed’s radar. Businesses have always been required to self-report income; however, now the IRS no longer needs to rely on the business for this information. Instead, it will get the information directly from the payment apps themselves. And it anticipates that it will generate $1 billion in additional tax revenue in the first year.
The business and the IRS will receive a 1099-K from the payment app provider. Additionally, the business owner may be expected to share social security number, personal tax ID or EIN to the payment app utilized so the payment app can properly issue 1099-K’s in compliance with the new rule. The user may also be asked by the payment app to designate transactions as business or personal. Most payment apps will be impacted by the new rule, with the possible exception of Zelle, according to its FAQ.
For those who utilize payment apps for personal transactions, there is no need to worry. Sending someone birthday cash or splitting the bill for a dinner are not transactions to report on taxes and neither the payment app provider nor the IRS will be checking for these types of transactions. Additionally, selling items at a loss is not taxable — so, if someone is selling old furniture for less money than was paid originally, then that is an exception, too.
For those who have concerns about whether to accept payment for their business through a payment app, it is best to consult with a tax professional and the payment app’s policies.
Marc Lamber is a Martindale Hubbell AV Preeminent-rated trial attorney. A director at Fennemore Craig, Lamber has been featured in national and local media, including the Arizona Republic, USA Today, ABC News, The Wall Street Journal, Forbes, the ABA Journal and many others.
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