Major Tax-Reporting Change for Users of Venmo, PayPal and Others

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The Internal Revenue Service is cracking down on people who underreport earnings received through digital payment apps such as PayPal, Venmo, Cash App, Zelle and others.

Through 2021, the law required third-party settlement providers to report to the IRS any user who received at least 200 commercial transactions totaling at least $20,000. Otherwise, it was up to you to report taxable income you received for goods or services.

As part of the American Rescue Plan Act of 2021, which went into effect on Jan. 1, 2022, the payment app companies now have to submit documentation to the IRS for anyone who has received a total of $600 in payments for goods and services during the calendar year.

According to the IRS, it will use this data for "new examination and collection approaches." In other words, if you try to dodge the IRS on taxable income you receive through these platforms, the IRS is going to come after you.

“If you’re someone who lives on tips — and it’s become really convenient for you to get those tips over PayPal, Cash App or Venmo — know that the IRS is going to be tracking that moving forward. And if you don’t like to report your tips, you’re going to have to go back to getting them the old-fashioned way, in cash,” money expert Clark Howard says.

“Now am I encouraging you to engage in tax evasion? Not exactly. I’m just telling you that if you do get a lot of income you don’t report using the various payment apps, know that the IRS is going to be snooping around.”

Not All Venmo, PayPal and Cash App Transactions of $600+ Will Get Taxed

The new legislation has sparked confusion in part due to ambiguous headlines.

For example, if you send your daughter $600 through Cash App as a wedding gift, the app won't be reporting that to the IRS.

Any transaction you send on a payment app that isn’t for goods or services still is not taxable, no matter how large the transaction.

Also, the new law is not a change in the tax code. It's simply a change in tax reporting for these third-party companies.

The changes aren’t limited to popular, big-brand payment apps. If you sell on third-party e-commerce platforms that accept business payments on your behalf, the change in reporting still applies. (Think stores on eBay, Amazon and Etsy.)

Many independent contractors and self-employed individuals conduct transactions with payment apps. Let’s say you’re a hairdresser, painter or handyman, and you accept payment via Venmo. If you do at least $600 in business on the platform in 2022, Venmo will report it to the IRS as taxable income.

The IRS isn’t relying on you to self-report, either. It has the ability to cross-check what you self-report with the information the platform sent to it.

4 Things You Need To Know About the Payment App Tax-Reporting Changes

1. Prepare for Your Payment Platform To Request Your Tax Information

To comply with the new regulations, platforms such as PayPal are going to need to collect some information from any user that accepts payments for goods and services.

"In the coming months, we will ask you for your tax information, like a social security number or tax ID, if you haven't provided it already, in order to continue using your account to accept payments for the sale of goods and services transactions and to ensure there aren't any issues when these changes take effect," PayPal wrote in a November 2021 blog post.

“This helps us meet our obligations to the IRS and ensures that you will be able to continue using your account and access PayPal and Venmo features and services.”

Many platforms are also adding an extra form during the payment process for the person initiating the transaction to identify the nature of the payment (gift? for goods and services?).

2. Your Payment Platform Should Issue You a 1099-K

If you earn at least $600 in taxable income through a platform such as Zelle or Cash App in 2022, the company should send you Form 1099-K. This form will contain the income you received that the platform has reported to the IRS.

However, if you work for a company or you’re an independent contractor, it’s possible you’ll receive a Form 1099-MISC for the same income. In that instance, you can rely on your 1099-MISC when you do your taxes and discard the 1099-K.

Again, according to PayPal, “The IRS will be able to cross-reference both our report and yours.” So it’s important that what you submit matches what’s on the 1099-K.

3. It’s a Great Time To Separate Personal and Business Accounts

Personal transactions involving gifts, favors or reimbursements aren’t considered taxable nor are personal items you sold at a loss.

For example, if you bought a set of bedroom furniture for $800 and sold it on Facebook Marketplace for $600, that’s not taxable.

Do you go out to eat with your friends twice a month and split the bill by having everyone else send you their share via Zelle? That’s not taxable either.

However, if you’re using the same payment app for personal and business transactions, it’s possible that something non-taxable finds its way onto your 1099-K.

You could probably show documentation — say, a receipt from your original furniture purchase — to prove that transaction shouldn’t be taxed. But creating a separate payment account for business income can eliminate those complications.

4. Expect Cash To Become More Popular for Some

Cash isn’t convenient. You have to go to an ATM or branch to withdraw it. And you have to carry it around.

Payment apps make it possible to shoot someone money from your bank account instantly in a more convenient fashion.

However, Clark expects more vendors, contractors and the like to start requesting cash again.

“Not telling you how to evade taxes, but I’m telling you what people are doing is they’re now asking to go back to the old way of doing things, which is to be paid in cash instead of with one of the payment apps,” Clark said on a recent podcast.

“That is the alternative that is the buzz as a response to what’s going on with the new federal rules. If you are going to continue to be paid by payment apps, yes, you’re going to have to report this income and pay tax on the income.”

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