If you are self-employed or have a secondary activity and, any income over $600 will now have to be reported to the IRS. A provision of the 2021 U.S. bailout, which went into effect Jan. 1, directs third-party payment processors to report to the IRS transactions received for goods or services totaling more than $600 per year.
Prior to this legislation, a third-party payment platform would only report to the tax authority if a user made more than 200 business transactions and made more than $20,000 in payments in a year.
This new law will not apply to your, Who . But it will apply to income you earn throughout 2022, which you report when filing in 2023.
There’s a lot of talk online about this new tax reporting requirement and if you’re making money through a digital payment app, you might be confused as to what’s true and what isn’t. Let’s separate fact from fiction.
Reality: This is not a tax change, but a reporting change
If you are self-employed, you should already be paying taxes on your total income, regardless of how you receive your payments for goods and services. The new legislation isn’t a tax change — it’s a tax reporting change so the IRS can keep tabs on transactions made through payment apps that often go unreported.
Going forward, third-party payment companies will issue you a 1099-K tax form each year if you earn $600 or more per year in income for goods or services. This tax form can include both taxable and non-taxable transactions, especially if the account is both business and personal.
The IRS will also receive a copy of the tax form and will not rely solely on self-declaration. “The IRS may cross-reference both our report and yours,” Paypal noted in a November 2021 statement.
To make it easier to manage your business finances, we recommend creating separate PayPal, Zelle, Cash App, or Venmo accounts just for your business finances.
Fiction: the taxman counts the money you send to family and friends
Rumors have swirled that the IRS is cracking down on money being sent through third-party payment apps to family and friends, but that’s not true. Personal transactions involving gifts, favors or reimbursements are not considered taxable. Here are some examples of non-taxable transactions:
- Money received from a family member as a holiday or birthday present
- Money received from a friend to cover his share of a restaurant bill
- Money received from your roommate or partner for their share of rent and utilities
Reality: Payment apps can ask you for tax information
Now that this new law is in effect, payment apps like PayPal may contact you to confirm tax information, such as your employer ID number, individual tax ID number, or social security number. If you own a business, you most likely have an EIN, but if you are a sole proprietor or self-employed or self-employed, you will provide an ITIN or social security number.
Fiction: Personal items sold at a loss will be taxed
If you sell personal items for less than what you paid and collect money through third-party payment apps, this new legislation will not affect you. For example, if you buy a couch for your home for $500 and later sell it on Facebook Marketplace for $200, you won’t owe taxes on the sale. This is because it is a personal item that you sold at a loss. However, you may need to present documentation from the original purchase to prove that you sold the item at a loss.
However, if you have a side hustle where you buy items and resell them for a profit through PayPal or another digital payment app, income over $600 will be considered taxable and reported to the IRS.
Be sure to keep a good record of your online purchases and transactions to avoid paying tax on any non-taxable income – and if in doubt, contact a tax professional for help.