As of January 1, 2022, mobile payments like Venmo, PayPal, and Cash App are now requiring reporting commercial transactions totaling more than $600 per year to the Internal Revenue Service (IRS). The change to the tax code was signed into law as part of the American Rescue Plan Act.
Previously, these mobile payment apps only had to tell the tax authorities when a person had over 200 commercial transactions per year the exceeded over $20,000 in total value, the IRS said. This includes millions of small business owners who rely on payment apps like Venmo, PayPal, and Cash App, who could be subject to a new tax law that just took effect in January.
Although, the change took effect in the new year, it is not applicable to the 2021 tax season, meaning the small businesses do not to take it into consideration until the 2022 tax filing season begins next year.
The new rule only applies to payments received for goods and services transactions, meaning that using Venmo, PayPal, and Cash App to send a loved one gift, pay your roommate rent or reimburse a friend for dinner will be excluded. Also excluded is anyone who receives money from selling a personal item at a loss; for example, if you purchased a couch for $300 and sold it for $250, the amount is not taxable.
Business owners are already required to report these incomes to the IRS. The new rule simply means that the IRS will figure out what business’s owners earned on the cash apps regardless of what those individual reports on their 1099-K because it broadens the scope of the threshold. A 1099-K is used to report goods and services payments received by a business or individual in the calendar year, but there are certain exclusions from gross income and are therefore not subject to income tax.
The apps may request additional information from users in the near future in order to properly report your transactions, and users may be asked to provide their Employer Identification Number (EIN), Individual Tax Identification Number (ITIN) or Social Security Number (SSN) if it’s not already on file.
PayPal said both “PayPal and Venmo offer a way for customers to tag their peer-to-peer transactions as either personal/friends and family or goods and services by choosing the appropriate category for each transaction.”
As always, if you have any questions about this topic or if you are interested in learning more, please contact us at (208)366-6997 or email us at info@kcstaxes.com.
