PayPal, Cash app, Venmo To Report Annual Transactions Exceeding $600

Posted on January 27, 2022 at 05PM


PayPal, CashApp, Venmo To Report Annual Transactions Exceeding $600

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In the last few years, digital wallet and mobile payment services have made it a lot easier and faster for businesses and customers to exchange transactions with little fees. If you own a business and you use payment apps such as PayPal, or Cash App for business transactions, it’s important to acquaint yourself with the recent change made to the tax law in connection to the services.

In this post, explains everything you need to know about the new tax rule and how it may impact your business. Keep reading to learn more.

What is the new Tax Rule about?

Year 2022 started with an introduction of a new tax rule that empowers the Internal Revenue Service (IRS) to perform a full audit on the income received by small businesses through transactions on third-party digital payment services.

As a result, third-party payment services such as PayPal, or Cash app, Venmo are now required by law to report a user’s commercial transitions to the IRS if the payments exceed $600 for the year. The third-party payment service must issue a Form 1099-K to you and the IRS reporting all the payments you got through the app.

This implies that if you receive over $600 payment for a year on business transactions through a payment app such as PayPal or Cash App, these transactions will henceforth be reported to the IRS.

According to the new rule, a business transaction is any form of payment made for a product or service, including tips. Therefore, it doesn’t include transactions made for personal purposes, such as reimbursement from a friend for lunch, or money for a student’s upkeep.

The new tax rule is part of the American Rescue Plan, a $1.9 trillion COVID-19 rescue package designed to hasten the nation’s recovery from the ruinous economic and health impact of the coronavirus pandemic. The IRE is monitoring payments received through payment apps to ensure businesses using the third-party payment processors are paying their fair share of taxes.



What Do You Need To Know about the New 1099-K Tax Reporting?

Effective from January 1, you will be furnished a Form 1099-K by your third-party payment providers for income collected through their services by January 31 of the following year (2023) and beyond.

In the near future, third-party payment processing services such as PayPal, CashApp or Zelle may request additional information from you to correctly report your business transactions on your Form 1099-K. For example, it is possible you are asked to show your Individual Tax Identification Number (ITIN), Employer Identification Number (EIN) or Social Security Number (SSN) if need arises.

Form 1099-K typically includes payments from both taxable and nontaxable income sources. A taxable source of income appears in your income such as wages, salaries, rents, retirement’s benefits, tips, and payments for good and services.  Nontaxable sources of income, on the other hand, are excluded from your income.  You’re required by law to report your taxable income on your income tax return by the end of the year.

Will Payment App Companies Have to Pay a New Tax?

Contrary to what many might think, the new rule doesn’t impose any new tax on online payment platforms and their users. Instead, it’s a mere tax reporting change to the existing tax law. With the new rule, it’s almost impossible for anyone to evade existing taxes owed if they are receiving taxable transactions through a payment app.

Does the new Rule apply to the previous year?

The new rule became effective starting from January 1, 2022, as a result, it isn’t applicable to the 2021 tax season. However, you have to take the new rule into consideration by the time you’re filing your tax return (in 2023).

Does the New Rule Apply to Zelle?

While the new rule requires third-party payment solutions that handle settlement of funds to issue forms 1099-K for transactions above $600, the rule doesn’t apply to Zelle. Payments made between family and friends, and eligible small businesses sent via the Zelle service are not subject to the new rule because Zelle only facilitates messaging between financial institutions, but doesn’t hold financial accounts or handle financial settlements.

However, if payments received through the Zelle Network are taxable, the consumer or beneficiary business has the responsibility to report such transactions to the IRS.

Keeping Good Records for Tax Reporting…

Since your Form 1099-K includes both taxable and nontaxable sources of income, keeping accurate records is very pivotal. It’s extremely important to choose a system that correctly reflects your income.

You want to maintain evidential records such as receipts, invoices, bank statements and other documents to show taxable income. In addition, you may consider keeping records either in electronic form or manually.

If you are a business owner, you can set up separate accounts on payment apps such as Cash App or Venmos for your personal and commercial transactions. This allows you to effortlessly keep a tab on your taxable and nontaxable transactions. This will save you stress and confusion that could arise when filing for your tax return.

Importantly, keeping accurate records can be helpful to justify your taxable and nontaxable sources of income if the IRS audits your tax return.

Payment app providers like PayPal and Venmos have options that allow their users to tag their transactions as either personal/family and friends or goods and services by choosing the appropriate transaction type.

That way, these third-party payment providers are relying on prompts from their users to help them classify the taxable versus nontaxable transactions. In addition, they provide useful guidelines, like frequently asked questions (FAQs) to help the user understand the details of the new tax rule if they receive a Form 1099-K.

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