- Beginning Jan. 1, 2022, if you receive $600 or more payments for goods and services through a third-party payment network, such as PayPal, Venmo or CashApp, these payments will now be reported to the IRS.
- A payment settlement entity (PSE), or third-party payment network, will be required to send users a Form 1099-K for payments made in settlement of reportable payment transactions for each calendar year.
- These changes are part of the American Rescue Plan, which is the 1.9 trillion stimulus package that was signed into law in March of 2021.
- The rule applies to most payment apps, however, Zelle indicates it is not subject to this law since they do not settle funds but only provide messaging between a financial institution and people making payments.
- The prior law required reporting only if payments in a calendar year exceeded $20,000 or more AND in excess of 200 completed during the year.
- A breakdown of how the new tax reporting requirements will operate are included below.
New PSE Tax Reporting for Payments of $600 or More
WIth the most previous law , the IRS required PSEs and third party networks to issue Form 1099-K to report the following transactions:
- Gross payments that exceed $20,000, AND
- More than 200 transactions within the current year
The new law requires users to receive Form 1099-K for payments of goods and services over $600 without the minimum transaction requirement, resulting in significantly more people receiving the forms and more total tax collected by the IRS in total.
About Form 1099-K for Payment App Tax Reporting
You will receive a Form 1099-K from PSEs or financial institutions for income received through electronic forms of payments by Jan. 31 of the following year.
In the following months, your PSEs may request you to provide your Employer Identification Number (EIN), Individual Tax Identification Number (ITIN) or Social Security Number (SSN) if this data is not yet on file.
Your Form 1099-K will report the total gross income in Box 1a received during the year without considering any adjustments, discounts, or refunds.
Your Form 1099-K will include payments from credit cards and online payments. You are required to report any income listed on your Form 1099-K from your business on your income tax return.
Does PayPal, Venmo, Cash App and Other PSE Users Have to Pay a New Tax?
Although this new law requires new tax reporting requirements, it does not impact changes to the existing tax law for any taxable or reporting requirements.
Form 1099-K is an informational tax form and may include amounts considered excluded from gross income for tax purposes. If you receive money that is a nontaxable source, there is no need to report that income on your tax return.
Some examples of money received that may be excluded include:
Funds received from a loved one or family member as a gift or reimbursement
Money received from a roommate to pay their share of the rent
Also, if you receive money from selling a personal item at a loss, you are not required to report the amount on your tax return. For example, if you purchased shoes for $100 and sold them for $50, that amount is not taxable.
Best Practices for Cash App Reporting
Though the new law does not create a new tax, it does increase the need to keep accurate records of any taxable income received.
Your system should include income and expenses, including:
Accounting and payroll records.
Tax forms and returns.
Other business financial records.
Business owners should set up separate third-party payment accounts for business transactions.
Millan & Co. is here to assist you with the new reporting requirements
Our comprehensive approach allows our unique clients to confidently navigate the complexities of taxation as new laws are implemented into the tax code.
We focus on client satisfaction, delivering high-quality services at fair rates. Schedule a call to learn how we can help you create a strategy that meets your goals.