By: Stephanie Smith, Tax Preparer & Enrolled Agent
Are you one of the many users of apps like Cash App, Venmo or PayPal to accept payment for services or products?
The reporting rules for these third-party payment processors are changing in 2022, but some of the major ones are getting a headstart and sending them out now for 2021.
Previously, you had to have 200 transactions and $20,000 in revenue before these companies would send you a 1099K. Now because of the American Rescue Plan Act, that filing requirement is lowered to $600, no matter how many transactions.
Now your transactions are being reported to the IRS, and that threshold has fallen from $20,000 to now only $600.
So what does this mean?
Whether you are a full-time hairdresser who accepts payment through Cash App or a part-time seller on Facebook Marketplace, even a property owner who accepts rent through PayPal, if you have received over $600, you will receive a 1099K from these third-party payment processors. And by the time you receive it, the IRS has already recorded it and will be making sure that you report it on your 2021 tax return.
So what do you need to do?
If you are a business owner and already have been claiming these payments as income, this is nothing new for you. But if you have not been claiming these payments as income, you better start now.
This includes all types of self-employment income, whether you are a freelancer, hired contractor or just trying to make some side money.
But what if you are receiving payment through these apps for selling used products, more like an online yard sale? Or maybe, as a hobby, you make custom cakes for close friends and they pay you through PayPal? These transactions will also trigger a 1099K.
Now if you have received over $600, and it is not for a business or hobby, you will need to make sure that you report it correctly when you file your taxes. The IRS wants you to pay taxes on this income.
But the total income on the 1099K, does not reflect refunds given to customers, personal repayments from friends, or money received for personal gifts. If you are a business owner, you are allowed to deduct your business expenses, therefore, lowering your tax liability.
Make sure to work with a knowledgeable tax professional to help advise you on how to file this form. It is better to be proactive about this income instead of reactive when the IRS mails you a bill.