A lot of people use mobile payment services like Venmo or PayPal these days. It’s a convenient way to handle payment transfers, and most use it to transfer money between families and friends. However, many self-employed people also use it to send and receive payment for business transactions. If you’re in the latter category, and you’ve received payments of more than $600 through one of these services, a new law may apply to you.
A surprise requirement
Tucked into the American Rescue Plan Act of 2021 is a provision requiring third-party payment processing services like PayPal, Venmo, and others to issue a form 1099-K (“Payment Card and Third-Party Network Transactions”) to those who receive more than $600 in payments for goods and services through the apps. In years past, the threshold for this was $20,000, but it’s been reduced to $600 for 2022 and beyond.
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Congress’ intention in lowering the threshold was to try to find unreported income. According to an analysis by the IRS, under-reporting and underpayment of taxes amounts to approximately $144 billion per year, so having the systems that collect some of this income and report it to the government makes sense.
What kind of transactions could generate a 1099-K?
Transfers between friends and family shouldn’t be subject to this reporting, according to Venmo’s FAQ on the subject. However, if you have a business account on Venmo you should expect to receive form 1099-K showing the amount that’s been reported to the IRS as income.
Some people may receive a form 1099 for a transaction they considered personal. For example, say you sold some used furniture for $800, and the buyer used Venmo to pay you. Venmo may issue you a form 1099-K, which means the transaction is reported to the IRS as income to you. Selling personal items (especially for less than you paid for them) isn’t usually taxable income, but Venmo may not know (or care to find out) whether a sale is personal or not, only that they are required to issue a 1099-K.
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What to do if you are a business owner
Jessica Dorsett, a CPA with Magnus Blue in San Marcos, had the following suggestions for people who use these payment processing apps for their business:
- Confirm your business EIN with the provider so that your 1099-K gets reported correctly
- Review your transactions to make sure they are properly categorized as business or personal
- If possible, keep your personal and business activity in separate accounts to make it easier to distinguish between them.
What if a personal transfer is reported erroneously as income?
It’s unclear whether asking Venmo or PayPal to correct an erroneously issued 1099 would be worth the hassle, or even successful for that matter. Interestingly, that’s the first suggestion in the IRS FAQ on the topic (Form 1099-K Frequently Asked Questions: Individuals | Internal Revenue Service (irs.gov)). Jessica’s suggestion is to report the full amount of the 1099 on your tax return as business income, then make adjustments to that number (with explanations if needed) to get to the real business income number.
Should you continue to use these services to transfer money between friends?
People who use services like PayPal and Venmo strictly for personal payment transfers shouldn’t be worried. However, in this first year of trying to comply with the new rules, a lot of people will probably be getting 1099s for non-business transactions. If you do, make sure you discuss it with your tax advisor.
