By EWN • 06 December 2022 • 18:54
A lot of payment apps are worried about a new income tax reporting rule imposed by the IRS. According to this rule, all payment processors of the third party in the US must report the payments received if they are more than $600 a year for goods and services.
This rule is imposed to tax gig workers and entrepreneurs with a side hustle. Formerly, the third-party payment processors only had to send Form 1099-K to the IRS if the gross payments exceeded $20,000 and the transactions were more than 200 in a calendar year. So, does PayPal report to IRS? To encapsulate it in one sentence, payment apps such as PayPal and Venmo have to inform the IRS if you make more than $600 with your side hustle.
If you are sending or receiving money from such apps in the current fiscal year, you have to pay taxes on them during the tax season. Also, you have to be proactive to ensure you are not sending a 1099-K by mistake.
According to Eric Bronnenkant, the head of tax at Betterment, an online financial adviser answers this question. He explains this rule with an example. Let’s say you are out with your friends and you decide to eat out and have some drinks. However, some of your friends don’t have enough cash and the group decides that you pay on their behalf and they will pay you later (been there, don’t count on it).
You decide to use Venmo to make the payment. Here’s what you need to do while paying the bill. Make sure that your payments are classified properly as something that is not goods or services. Make a note of to whom the payment is made to ensure that there’s no chance of error. On payment apps like Venmo and PayPal, you can designate whether you are paying the amount to family and friends instead of a business for goods and services.
If you use Zelle or cash you don’t have to report it on 1099-K. The network operator behind Zelle, Early Warning Services states that payments between family and friends, and small eligible businesses sent via the Zelle network are not affected by this law as Zelle allows messaging between financial institutions and it doesn’t handle settlement of funds or hold accounts.
Bronnenkant, however, advises that taxpayers should report all their taxable income irrespective of the payment method. PayPal, which owns Venmo, mentions that it monitors accounts to make sure people aren’t masking payment for sales of goods and services as personal payments.
If you get reimbursement for a share of a meal or receive money as a gift, the law states that it shouldn’t be reported on Form 1099-K. However, in this process mistakes might happen. If you receive Form 1099-K by mistake, you have to contact the payment processing company and request them to send a correction to the IRS.
Since it is a new law, the efficiency of the process is unclear until companies start sending 1099-Ks to the IRS in 2023. So, keep an eye on the 1099-Ks you might receive.
This law clearly states that if someone receives more than $600 from payment processing apps, they will get a 1099-K form. According to this law, taxpayers have to report all their income from such payment processors in 2023. So, always keep an eye out for a 1099-K form you might get in the mail.
According to a new income tax reporting law, payment app providers such as PayPal and Venmo have to report and issue a 1099-K if taxpayers make $600 or more from selling any goods or services during the calendar year starting from 2022 transactions.
If the transactions fall into the category of family and friends, they would not be subjected to Form 1099-K reporting as it is not looked at as payment.
Earlier the payment threshold was $20,000 or more and 200 transactions a year. Now, the threshold has decreased to $600 or more and 200 transactions a year. If this criterion is met, PayPal has to issue a 1099-K form to the IRS. This rule is imposed to tax gig workers and entrepreneurs with a side hustle.
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