The Internal Revenue Service (IRS) has declared open season on tax evading businesses using person-to-person (P2P) payments apps like Cash App, Venmo and Zelle. A new rule starting from January 1, 2022, will place reporting requirements on businesses with app income that exceeds $600 in a tax year. The change to the tax code was signed into law as part of the American Rescue Plan Act, the Covid-19 response bill passed in March 2021.
Technically, businesses were always supposed to report such income to the IRS, but many did not keep records for small transactions. As of January 1, 2022, payment processors are required to report such transactions to U.S. tax authorities. The P2P payment apps will also now be required to send the 1099-K form to businesses with electronic transactions greater than $600.
Previously, the IRS required payment apps to send their users 1099-K forms for reporting purposes if their gross income exceeded $20,000 and they had more than 200 transactions per year.
Now that this new law is in effect, the payment apps may reach out to merchants operating on their app to confirm tax information, such as employer identification number (EIN), individual tax identification number (ITIN) or Social Security number (SSN). If you own a business, you most likely have an EIN, but if you're a sole proprietor or individual freelancer, you'll want to supply your ITIN or SSN.
Payments received from friends and family, the original purpose of P2P apps, won’t be taxed based on the new regulation.
Some examples of non-taxable income are money received from:
The new law does not apply to business earnings from the 2021 tax year or earlier. If you sell personal items for less than you paid for them and collect money via a P2P payment app, this new legislation also won't impact you. You may, however, be required to show documentation of the original purchase to prove that you sold the item at a loss.
For example, if you buy a wood shelf for your home for $100 and later sell it on Facebook Marketplace for $50, you won't owe taxes on the sale. That's because it's a personal item you've sold at a loss.
The IRS said that the burden of these latest changes will apply to people who sell items on internet auction sites like eBay and people who own “holiday craft businesses" so long as they accept credit card payments through these apps.
Some payment apps make categorizing and recording the appropriate transactions easier. Both PayPal and Venmo offer a way for customers to tag their P2P transactions as either personal/friends and family or goods and services by choosing the appropriate category for each transaction. Users should select Goods and Services whenever they are sending money to another user to purchase an item. These transactions are also eligible for coverage under PayPal and Venmo’s Purchase Protection Program, but that’s a whole other topic.
For now, merchants on P2P payment apps need only remember that they are just two certain things in life: death and taxes.
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