Some say that as we age, we become our parents. Others say the pace of technology drives a wedge between generations. Both may be right. Take the question of how much cash you carry. Young people use cash and checks much less frequently than most Baby Boomers, relying instead on debit cards and contactless apps such as Venmo or Cashapp to pay for everything from dinner to rent. This trend has promoted a lifestyle—for better or worse, depending on your age— that is increasingly dependent on digital transfers.
In January, when news media reported that all Venmo, Zelle, and Paypal transactions over $600 would be taxed, many young users of those digital services were confused, dismayed, or both. Consumers worried that their charges would be scrutinized, that their buying power would weaken, and that they would sink in a morass of IRS forms during tax season. Those fears are largely unwarranted. Most people will not suffer any tax complications from the new IRS rules, and, in most cases, you won’t have to report that your money is being received over these peer-to-peer networks.
If Your Annual Commercial Transactions Via Apps Like Venmo Exceed $600, You May Owe Taxes Next April
The new IRS rules stem from the American Rescue Plan Act. They became effective on January 1 of this year, but their reporting requirements will begin with your 2022 tax return. The rules are intended to combat under-reported income earned on “third-party settlement organizations,” and the rules target people who conduct business activities on the apps. In other words, the new reporting requirement applies only to those who accept payments on these apps for the sale of goods and services. Specifically, if you accept more than $600 for goods and services through a settlement organization during the calendar year, that settlement organization must send you a Form 1099-K for the gross amount of payments you received. You must use that information in conjunction with other records to determine your tax liability for 2022.
In accordance with the new IRS rules, settlement organizations are required to report commercial transactions that cumulatively pass that $600 threshold. They will then “file and furnish” a 1099-K form for you—you will not have to prepare it yourself. They will also produce “payee statements,” which are written statements containing all the information that they will report to the IRS. If you meet the requirements to receive a 1099-K, you will receive your payee statement in January 2023.
You Won’t Owe Taxes If Your Roommate Reimburses You for Rent Using a Digital Funds Transfer
But here’s some good news: Non-commercial payments are exempt from the new rules. Thus, in most cases, if you are not operating a business that accepts digital payments, then you are not impacted. You will not owe the IRS when your friends pay you for drinks or your roommates reimburse you for utilities or rent. However, you should note that you will owe taxes even if you accept payments for goods and services only occasionally, so long as your total earnings exceed the threshold. For example, you could receive a 1099-K for passing the $600 threshold after selling your Beanie Babies a few at a time on E-Bay if you accept payment through one of these platforms.
Small business owners may be tempted to avoid reporting cash payments, to avoid registering as a Business account, or to dissuade buyers from indicating on the app that they are paying for goods and services. Beware: such strategies are illegal. All income, even income received in cash, sent online, or illegally earned, must be reported to the IRS.
If you have a “side hustle” like walking dogs, operating an Etsy store, or freelance creative work, you may have questions about how to run your business without running afoul of the IRS. Mountain Dearborn offers a full suite of services for businesses, including incorporation, employment, financing, contracts, tax law, and litigation.
Image: Tech Daily