New tax rule targets businesses that accept payments through apps
If you are self-employed, or if you are an independent contractor or, even if you only operate a side business, and you use payment apps like Venmo, Paypal, or Cashapp, the IRS is watching you now. Due to a new tax reporting regulation that went into effect on January 1, 2022, most payment apps are now required to issue Forms 1099-K to any business receiving more than $600 total in payments electronically during the calendar year. Previously, this was only necessary if the company received more than $20,000 and performed 200 or more commercial electronic transactions in a year. It’s a big difference.
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This new rule imposes no new taxes on businesses that use payment apps and does not apply to 2021 taxes. It is, however, a wake-up call for companies who thought that if they received money to sell goods or services through payment apps, they did not have to report it on their tax returns or they otherwise thought they might fly under the federal government’s radar. Businesses have always been required to self-report their income, however, the IRS no longer needs to rely on you for this information. Instead, it will get the information directly from the payment apps themselves. And he predicts it will generate $1 billion in additional tax revenue in the first year.
Your business and the IRS will receive a 1099-K from the payment application provider. Additionally, you may need to share your Social Security Number, Personal Tax ID Number, or EIN with the payment application you use in order for the payment application to properly issue 1099-Ks in accordance with the new rule. The payment application may also ask you 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 FAQs.
For those who use payment apps for personal transactions, there’s no need to worry. Sending money for someone’s birthday or splitting your dinner bill are not tax-reportable transactions and neither your payment application provider nor the IRS will verify these types of transactions. Also, the sale of items at a loss is not taxable. Therefore, if you are selling old furniture for less than what you originally paid, that is also an exception.
If you’re in doubt about whether to accept payment for your business through a payment app, it’s best to consult with your tax professional and your payment app’s policies.
Marc Lambert is a preeminent attorney at Martindale Hubbell AV. A director at Fennemore Craig, Lamber has been featured in national and local media, including the Arizona Republic, USA todayABC News, The Wall Street Journal, Forbesthe ABA Journal and many more.