What Do New Payment App Regulations Mean for Taxpayers?

You may have heard about new tax reporting rules for businesses using third-party payment apps such as PayPal, Cash App, Venmo, Zelle, etc. This has caused some confusion for app users, but we’re here to help you understand how it will (or won’t) affect your taxes next year.

What’s changed?

Until this year, payment platforms were not required to report business transactions to the IRS unless you made at least 200 separate transactions totaling at least $20,000 in a calendar year.

Beginning Jan. 1, 2022, these thresholds dropped drastically — as a new tax rule, payment apps now must report business transactions totaling $600 or more in a year, regardless of the number of transactions you made.

You’ll receive Form 1099-K from the payment app if you meet this threshold. This form is an informational tax document detailing the gross amount of all your reportable transactions.

Why did this change happen?

The new tax reporting requirement is part of a provision in the American Rescue Plan passed in 2021.

Many people turned to side hustles during the pandemic to fill their time and make some extra cash while stuck at home. With the gig economy growing, this new regulation aims to lessen the amount of unreported and underreported taxable income from individuals and small businesses.

Will this impact me if I only use payment apps for personal transactions?

The new law only affects business app users who accept payment cards (credit or debit) or use third-party payment networks (PayPal and similar apps) for the payment of goods and services.

If you only use payment apps for personal transactions between family and friends — think reimbursing a roommate for your half of the rent or your share of expenses during a night out — you should be in the clear.

Some apps like PayPal and Venmo even allow users to select a designated “friends and family” category when making a transaction to avoid it potentially being flagged as a business payment.

Will I get a 1099-K if I sell items on eBay or other online marketplaces?

You will receive Form 1099-K if your sales reach $600 or more on eBay or similar platforms, but you only need to pay taxes on any profits you make. If, for example, you bought a new lawnmower for $1,000 last year and you sell it on eBay for $700, you won’t have to pay any income tax on the sale.

Gifts, reimbursement, and selling personal items at a loss are excluded from the new reporting regulations. These types of transactions are generally excluded from your gross income and are not subject to income tax. So, if you only use payment apps or online marketplaces for these reasons, you don’t need to worry.

What happens if a payment app sends me a 1099-K for a nontaxable transaction?

Even though personal transactions between friends and family don’t need to be reported, it’s possible you may receive a 1099-K from a payment service app for a nontaxable transaction.

Freelancers who use these apps, for example, might get a 1099-K from the payment app as well as a 1099-NEC or 1099-MISC from their client for the same transaction. In this case, it’s up to you, the taxpayer, to let the IRS know the tax form you received was for a nontaxable transaction.

Keeping your business finances separate from your personal finances is a good rule of thumb for all business owners. To limit the possibility of incorrectly receiving a 1099-K, always make sure to keep your personal and commercial transactions separate on payment apps and don’t accept any nontaxable payments via debit or credit cards.

If you want to read up on this issue further, check out this helpful FAQ page from the IRS about the new payment card and third-party app requirements.

Will this increase my taxes next year?

Some people may mistake this for a new tax, but tax laws have not changed — only the reporting regulations. Income made in exchange for goods and services has always been taxable; now, there’s just a bit more paperwork required.

Form 1099-K doesn’t change how much you pay in taxes. Rather, it’s the equivalent of the payment app saying, “FYI, these were your taxable transactions this year, so don’t forget to report that income.”

If you’ve been correctly reporting your income, you shouldn’t see any significant changes to your taxes next year. But if you’re new to the gig economy or you’ve been flying under the IRS’s radar because you haven’t received a 1099-K in the past, it might be a good idea to crunch some numbers and figure out how your taxes could be affected.

Why did I get a 1099-K for the 2021 tax year?

The new rule did not go into effect until Jan. 1, 2022, which means the change will begin with your 2022 income tax return that you will file in 2023.

However, some states have already implemented the new reporting regulations. If you live and work in any of the following states, you may be getting a 1099-K this year:

  • Arkansas
  • Illinois
  • Massachusetts
  • Washington D.C
  • Maryland
  • Mississippi
  • Missouri
  • New Jersey
  • Vermont
  • Virginia

How do I report my 1099-K transactions on my tax return?

You should report your 1099-K business payments as you would typically report your business income. Depending on your business structure, you should use Schedule C or Forms 1120, 1120-S, or 1065.

Do I need to do anything else?

If you’ll be receiving Form 1099-K next year, app providers will reach out to let you know if they need any additional info from you, such as your employer identification number (EIN), taxpayer identification number (TIN), or Social Security number (SSN).

It’s also a good idea to make sure the name you use on your payment app matches the name the IRS has on file for you. This goes for individual names and legal business names. Name discrepancies could cause complications, which is the last thing anyone wants to deal with during tax season!

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