If you earn any significant income on third-party payment apps like PayPal, Cash App, or Venmo, you will have to report transactions over $600 to the IRS beginning this calendar year. The apps, themselves, will actually report the transactions, but you could be on the hook for more taxes than in years past. Prior to the change, apps would only report earnings that exceeded $20,000 per year or 200 total transactions. The closer IRS scrutiny went into effect this year as part of Biden’s American Rescue Plan.
The new law applies to taxes filed in the calendar year 2023 with data from 2022. This means that this season’s taxes are not affected by the change, yet. The IRS will gather data on your third-party payment app usage this year and expect more specific tax returns next year.
According to the IRS, the change should not affect the actual paying of taxes for anyone who declares all of their legitimate income. The change is a reporting change, basically giving the IRS power to dive more deeply into your small business transactions to help determine whether you are fulfilling your entire tax obligation. The IRS believes that many transactions through payment apps go unreported, even when legitimate income (not small payments like a split check at dinner) is at stake.
How payment apps are preparing for the change in tax law
Now, third-party payment companies will issue you a 1099-K tax form each year. Many of them will require one on file to even sell on their platform. This tax form might include taxable and nontaxable transactions, particularly if the account is for both business and personal use.
The IRS then uses the company’s form to cross-reference their data with whatever data you physically report, yourself.
Apps will not report personal transactions like small gifts, reimbursements, and favors as long as they qualify as unearned income. For example, you can still share rent or utility payments with roommates. However, if you own the property and receive rent via a payment app, that income is reportable.
Many of the payment apps are in the process of reaching out to customers for more personal details like tax ID numbers or Social Security numbers.
Because the IRS will be capturing more data than ever before, it helps to be prepared with your own data. Say you sell a car online at a loss; if you can provide the original receipt for the car, thus proving the loss, then the money is not taxable. The new rules really just want to track small business owners, not everyday buyers, sellers, and traders of basic goods.
Therefore proper record keeping will be essential in the event of a dispute with the IRS. The agency’s own representatives will tell you the same: when in doubt, have documentation ready. And file your taxes with the help of a qualified professional or professional service when possible.