The Internal Revenue Service is cracking down on all payments made through digital payment apps. The IRS now requires platforms like Venmo, PayPal, and Cash App to report every transaction over $600 in one year.
The new reporting requirement will ensure that small businesses which receive payments through digital payment apps will pay their fair share in taxes.
Starting Jan. 1, 2022, all third-party payment processors are required to report such transactions. Businesses have always been required to self-report such incomes to the IRS. However, most did not, claiming they did not keep track of smaller transactions.
The payment apps were previously required to issue users a 1099-K form if their gross income exceeded $20,000. The same form was issued if the business or individual had more than 200 transactions per year.
This new tax law was part of the March 2021 American Rescue Plan, which was utilized as a stimulus package for the COVID pandemic. The rescue plan, which included increased taxation for the average American, passed without a single Republican vote.
The new rule is only for goods and services transactions. It does not apply to personal payments, such as paying a roommate for rent or reimbursing a friend.
The reporting rule excludes anyone selling personal items at a loss, such as a couch bought for $700 and sold for $650.
However, the IRS has said the burden of proof for the exceptions lies with the taxpayer to provide evidence of personal use or loss to avoid such taxes.
The cash apps will now be required to send the 1099-K form to businesses with electronic transactions greater than $600. The new change will apply for the 2022 tax season.
“For the 2022 tax year, you should consider the amounts shown on your 1099-K when calculating gross receipts for your income tax return. The IRS will be able to cross-reference both our report and yours,” PayPal said on its website.
The new tax rule is separate from a proposed IRS reporting requirement that was initially proposed to report transaction data on accounts with more than $600 aggregate inflow and outflow.
Originally part of President Biden’s Build Back Better plan, the proposal was raised to a $10,000 threshold after much pushback and has not yet been acted on by Congress.
Individuals and Small Businesses should keep a record of all transactions to take advantage of the exceptions. Otherwise, taxes will be due on all transactions $600 and greater.