Newsflash! The Cost of Using Payment Apps
Users beware—for 2022 and future tax years, the IRS has changed its filing requirements for transactions settled through third-party payment networks, such as Paypal, Venmo, Cash App, Airbnb, and other online payment apps.
These digital payment systems support transfers of currency through the internet, serving as an alternative to a paper transfers completed by paper cash, check, or money order. Millions of small businesses, freelancers, and independent contractors rely on these platforms to receive payment for goods and services. With e-commerce supported through financial technology (FinTech) dominating the marketplace, it comes as no surprise that the IRS would need to adjust the manner in which these transactions are reported.
In response to taxpayers underreporting taxable income received via these online payment processors, Congress passed the American Rescue Plan Act of 2021 (the “Act”), which expanded reporting requirements. Prior to the Act’s passage, the IRS only required reporting these online transactions when (i) payments exceeded $20,000, and (ii) more than 200 transactions were completed during the year. The Act eliminates the minimum transaction requirement and now requires all third-party payment processors to report payments received for goods and services of more than $600 per year. This means that anyone receiving at least $600 over the course of a year in payments for goods and services through one of these apps can expect to receive a Form 1099-K.
It is important to note that Form 1099-K is an informational tax form and may include amounts considered excluded from gross income for tax purposes. Under the Act, if you receive nontaxable payments that exceed the $600 threshold, you will not need to report it on your tax return; however, you may still receive a Form 1099-K. For this reason, many tax lobbyists argue that these new reporting requirements are confusing and will result in taxpayers overreporting income.
Some examples of nontaxable payments include funds received from a friend as a reimbursement for splitting the dinner bill or from a roommate to pay their share of the rent. Additionally, if you receive money from selling a personal item at a loss, you are not required to report the amount on your tax return.
To address the confusion arising under the Act’s new reporting requirements, a new bill has been introduced, which, if enacted, would increase the reporting threshold from $600 to $5,000. For now, individuals and businesses alike should keep detailed records when transacting on these platforms, and come January, watch for any Form 1099-Ks they may receive. Contact your tax professional for more information on the reporting requirements for income received through online payment processors.
If you have any questions about this information, please do not hesitate to contact Tara M. Coffman at tcoffman@satclaw.com .