New IRS Rule Concerning Payments Via Venmo, Cash App & PayPal May Affect Millions.
Taxpayers may be “shocked” by the lower bar for reporting Venmo, Cash App & PayPal revenues.
Online earners in the United States may be in for a harsh surprise when they submit their taxes in 2023. This is due to the fact that starting in 2018, taxpayers will have to report to the IRS any transactions totaling at least $600 that they receive via payment applications like Venmo, Cash App & PayPal.
The IRS cautioned small business owners about the $600 barrier for obtaining Form 1099-K for third-party payments exceeding $600 in an explainer published online last month. A user’s business transactions will now need to be reported to the IRS via third-party payment processors if they total more than $600 for the year. Before, if a user’s gross revenue exceeded $20,000 or if they had 200 distinct transactions during a calendar year, the payment apps had to issue them a Form 1099-K.
“I think it will come as a shock out of nowhere that people are getting these,” Nancy Dollar, a tax lawyer at Hanson Bridgett, said in a FOX Business interview.
When Democrats passed the American Rescue Plan in March 2021 without the support of any Republicans, they brought about the shift. Now the form will be triggered by a single transaction over $600.
The modification aims to crack down on Americans who underreport their gross income in order to avoid paying taxes.
However, many claim that it represents the worst kind of governmental overreach and that it could ultimately harm small enterprises.
Millions of Americans who earn a living online risk being swept up by the lower reporting level.
According to the Pew Research Center, almost one in four Americans earns additional money on the side by renting out their home, selling something online, or working on a digital platform.
According to Dollar, the modification might deter some Americans from engaging in the gig economy.
“Everyone I know offloads old goods that they have on these platforms because it’s so easy,” Dollar said. “Or they’ve been engaging in gig work on a very casual basis, and that affects gig workers as well who have been underreporting their income. I think it’s going to force people to either cut down on those activities or kind of take them more seriously and track them.”
The new rule only applies to payments received for goods and services transactions, meaning that using Venmo or PayPal to send a loved one a gift, pay your roommate rent or reimburse a friend for dinner will be excluded. Also excluded is anyone who receives money from selling a personal item at a loss; for example, if you purchased a couch for $300 and sold it for $250, the amount is not taxable.
“This doesn’t include things like paying your family or friends back using PayPal or Venmo for dinner, gifts, shared trips,” PayPal previously said.
To be clear, business owners already have to inform the IRS of that income.
The new regulation basically means that the IRS will determine how much money business owners made using cash applications, independent of how much money they actually disclose on their 1099-K.
There are some exclusions from gross income that are not subject to income tax, such as amounts from selling personal items at a loss, amounts sent as reimbursements, and amounts sent as gifts. Form 1099-K is used to report goods and services payments received by a business or individual in the calendar year, but there are some exclusions from gross income that are not subject to income tax.
“For the 2022 tax year, you should consider the amounts shown on your Form 1099-K when calculating gross receipts for your income tax return,” PayPal said in a Q&A on its website. “The IRS will be able to cross-reference both our report and yours.”
For transactions done electronically or by mail, the cash applications must now deliver Form 1099-K to users who satisfy the most recent standards.
Users may be required to enter their Employer Identification Number (EIN), Individual Tax Identification Number (ITIN), or Social Security Number (SSN) if it isn’t already on file in the near future in order for the applications to properly report transactions.