Making money on PayPal or Cash App? Your transactions will be reported to the IRS
Starting January 1, 2022, commercial transactions exceeding more than $600 per year must be reported to the IRS by mobile payment companies including PayPal, Venmo, and Cash App.
The American Rescue Plan made changes to the requirements for the 1099-K form in reporting payments or money transfers by payment apps like Cash App and Venmo. The new reporting requirement will begin with the 2022 tax season and have no effect on 2021 taxes. Beginning with all transactions from January 1 on, income received from goods or services as a payment transfer will be reported to the IRS, as long as the payments total $600 or more for the year.
This is much lower than the previous Form 1099-K annual $20,000 or 200 transactions requirement. Self-employed business owners, online vendors and ecommerce sellers, as well as independent contractors could all be affected by the change, and will be required to record their social security number in their payment account.
Is the Internal Revenue Service (IRS) taxing money you give to relatives and friends?
Individuals who make over $600 in mobile payment app transactions are not required to declare or pay taxes, according to the IRS. The change in 1099-K affects only taxable income from business transactions, not personal payments. The reporting threshold only affects costs for commercial items or services, not personal expenses such as splitting a dinner bill with friends and relatives.
Venmo and PayPal both have the option for consumers to indicate whether a transaction is either a product or service, or a personal transaction being sent to family and friends. This will classify the transaction in the correct category of either personal or commercial.
Anyone who makes a little extra money on the side by renting out their home on Airbnb or selling handcrafted items on Etsy will be affected by the new $600 tax reporting requirement level. Those online platforms are likely to issue a 1099-K to both you and the IRS.
People who send money to pay their portion of dinner or rent do not have to record those payments on their tax returns. But as soon as you start receiving business payments on a P2P platform, those earnings must be reported. Customers that receive payments for the sale of products and services through P2P payment platforms, such as PayPal, Venmo, Stripe, and others, are obligated to disclose information to the IRS.
Payment platforms like Stripe, Venmo, and PayPal are required by law to provide information about their customers to the IRS when they receive payments in exchange for goods or services, after they exceed the $600 per year minimum.
And if you receive an inaccurate 1099-K from a third-party payment network — say, because you sold old household items for less than you paid for them — it will be your responsibility to explain to the IRS why that money is not taxable and doesn’t need to be reported on your income tax return. It is a good idea to seek tax advice from your tax professional.
Keep Good Records for Tax Reporting
Keeping meticulous records is essential, especially since a Form 1099-K could include income that both taxable and nontaxable. You don’t want to have to pay taxes on the income that is non taxable and the only way to know is by keeping receipts, bank statements, and invoices.
If you are receiving money for goods and services, it is better to keep separate accounts for personal and business transactions, which will make it easier to track them.
Don’t put off keeping records updated by thinking that you will catch them all up later. You will probably forget what some transactions were for, and the effort it takes to try to remember and keep your records in order is not worth putting it off. The best thing is to update everything at the end of every month so you stay current throughout the year.
Many people have multiple streams of income from different types of services or goods. Don’t lump them all together, but keep your records separate for each type of income you have. You may only receive one Form 1099-K with all your payments added together, but you still need to have records of each business type in case you have to report them separately or justify to the IRS.
The 1099-K you receive may not have all your income correctly reported, or you may not receive a form at all. Don’t think this means you don’t have to report your earnings to the IRS. The IRS has never thought that not getting a form was a legitimate justification for not reporting; but it has accepted it as an excuse when there were only minor variations in the amount.