You may have heard about the new tax filing rules for businesses using third-party payment apps like PayPal, Cash App, Venmo, etc. or not) will affect your taxes next year.
These changes were originally supposed to go into effect for tax year 2022, but the IRS recently pushed these changes back by a year. Now, the $600 threshold mentioned below will not officially take effect until fiscal year 2023.
Form 1099-K frequently asked questions
What has changed?
Previously, payment platforms were not required to report business transactions to the IRS unless you made at least 200 separate transactions totaling at least $20,000 in a calendar year. After the IRS delay, this still holds true for the 2022 tax year.
Starting January 1, 2023, these thresholds have been dramatically lowered: As a new rule, payment apps are now required to report business transactions totaling $600 or more in a year, regardless of how many transactions you’ve made.
you will receive Form 1099-K from the payment application if you reach this threshold. This form is an informational tax document that lists the gross amount of all your reportable transactions.
Why did this change occur?
The new tax reporting requirement is part of a provision of the US Bailout Plan passed in 2021.
Many people turned to side hustles during the pandemic to occupy their time and earn some extra money while stuck at home. With the growth of the gig economy, this new regulation is intended to decrease the amount of unreported and underreported taxable income from individuals and small businesses.
Will this affect me if I only use payment apps for personal transactions?
The new requirements only affect app users who sold goods and services for profit and accepted payment cards (credit or debit) or used third-party payment networks (PayPal and similar apps) for payment of these goods and services.
If you only use payment apps for personal transactions between family and friends (think reimbursing a roommate for half the rent or their share of expenses during a night out), you should be free.
Some apps like PayPal and Venmo even allow users to select a designated “friends and family” category when making a transaction to prevent it from being marked as a business payment.
Will I get a 1099-K if I sell items on eBay or other online marketplaces?
You will receive Form 1099-K if: your sales reach $20,000 and 200 or more transactions; live in a state with a lower 1099-K reporting threshold; or was subject to backup withholding on eBay or similar platforms. That being said, you only need to pay taxes on the profits you make. If, for example, you bought a new lawn mower for $1,000 last year and sell it on eBay for $700, you won’t have to pay any income tax on the sale.
Gifts, reimbursement, and the sale of personal items at a loss are excluded from the new reporting rules. These types of transactions are generally excluded from your gross income and are not subject to income tax. So if you only use paid apps or online marketplaces for these reasons, you don’t need to worry.
What happens if a payment application sends me a 1099-K for a non-taxable transaction?
Although personal transactions between friends and family are not required to be reported, you may receive a 1099-K from a payment service application for a non-taxable transaction.
Freelancers using these apps, for example, can get a 1099-K from the payment app, as well as a 1099-NEC or 1099-MISC from their client for the same transaction. In this case, it is up to you, the taxpayer, to inform the IRS that the tax form you received was for a non-taxable transaction.
Keeping your business finances separate from your personal finances is a good rule of thumb for all business owners. To limit the possibility of incorrectly receiving a 1099-K, always be sure to keep your personal and business transactions separate in payment applications and do not accept any non-taxable payments via debit or credit cards.
If you want to read more on this topic, check out this helpful FAQ page from the IRS about the new payment card and third-party application requirements.
Will this increase my taxes next year?
Some people may mistake this for a new tax, but the tax laws haven’t changed, just the reporting rules. Income obtained in exchange for goods and services has always been subject to tax; now, just a little more paperwork is required.
Form 1099-K does not change the amount you pay in taxes. Rather, it’s the equivalent of the payment app saying, “FYI, these were your taxable transactions this year, so don’t forget to report those income.”
If you’ve been reporting your income correctly, you shouldn’t see any significant changes to your taxes next year. But if you’re new to the gig economy or have been flying under the IRS radar because you haven’t received a 1099-K in the past, it might be a good idea to run some numbers and find out how your taxes work. could be affected.
How do I report my 1099-K transactions on my tax return?
If you only sold personal items or earned income from hobbies, you must report that income on Schedule D or Schedule 1, respectively.
If you are self-employed or in business, you should report your 1099-K business payments as you normally would with business income. Depending on the structure of your business, you must use Schedule C or Forms 1120, 1120-S, or 1065.
I need to do something else?
If you will receive Form 1099-K next year, application providers will contact you to let you know if they need additional information from you, such as your Employer Identification Number (EIN), Taxpayer Identification Number (TIN), or Social Security. Security number (SSN).
It’s also a good idea to make sure the name you use on your payment application matches the name the IRS has on file for you. This applies to individual names and legal trade names. Name discrepancies can cause complications, which is the last thing anyone wants to deal with during tax season.
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