Are you a business owner or gig worker who accepts payment through Venmo, PayPal, Cash App or another digital payment app? If so, there’s a new IRS law effective January 1 that changes reporting requirements for money received through these apps when using a business account. Don’t be alarmed, this requirement does not apply to personal accounts. 

Enacted as part of the 2021 American Rescue Plan, the new law requires digital payment processors to report payments for goods and services totaling over $600. Previously, these digital payment platforms only had to report to the tax agency when a user received over $20,000 in gross payments and had more than 200 business transactions. The new $600 reporting threshold applies to any number of transactions.  

New reporting, not a new tax 

The law does not impose a new tax. You’ve always been required to report and pay appropriate taxes on all business income. The legislation is an attempt by the IRS to capture what has previously gone unreported. As with cash payments, the agency suspects some income received via digital payment apps may not be included in tax returns. 

If you receive over $600 in digital app payments for goods and services, the payment processor will issue a Form 1099-K, Payment Card and Third-Party Network Transactions, to you and the IRS, starting in early 2023 for 2022 transactions. You will need to document and report your business income for your tax return.  

Distinguishing business from personal payments 

The new requirements are supposed to apply to business transactions only. Personal payments, such as for shared dinners or gifts, will not have to be reported to the IRS and are not taxable. How will the apps differentiate between the two? As an example, Venmo, which is owned by PayPal, allows users to differentiate payments to family and friends vs. business goods and services. At the end of the year if payments marked for goods and services total more than $600, the user will receive a 1099-K. 

To help ensure compliance, Venmo is asking users who receive payments for goods and services to provide tax ID information, such as a Social Security number or Employer Identification Number. If a Venmo user’s business payments reach the $600 threshold and the third-party app has not received the necessary information, it may hold payments. Using cash or Zelle (which facilitates bank transactions) still avoids 1099-K reporting. 

What about marketplace sales? 

Total sales of more than $600 on auction or marketplace sites such as eBay or Etsy will also be reported by those companies on a Form 1099-K. This doesn’t necessarily mean the seller owes tax on that amount. If the items were sold for less than the original purchase price, there’s likely no tax due. For example, there’s no profit to report for a $500 purse sold for $200 on eBay. 

It’s up to the taxpayer to report any profit on these items. If you use 3rd party payment apps or marketplaces, you’ll want to maintain good records of your transactions for tax reporting. The 1099-K you receive may not match taxable income.  

Your CPA can help!  

If you have questions about the new IRS reporting requirements, we can help. Contact us today!