Starting this year, Americans will be required to report business transactions from Venmo, PayPal, and other third-party payment apps over $600 to the IRS.
The Biden administration’s US bailout plan requires taxpayers to file a 1099-K for “gross payments for goods or services over $600.”
The earnings were already taxable, so the law aims to codify how they are reported to tackle fraud.
More importantly, the rule is specifically geared toward business transactions. So if you’re sending money to a friend, selling something online, or collecting a one-time payment, the new rule doesn’t apply to you.
Taxpayers are required to report to the IRS on their 2021 tax returns business transactions from Venmo, PayPal, and other third-party payment apps over $600
Taxpayers covered by the new law will receive a 1099-K form from each of the third-party payment processors they transacted with
When is a $600 Venmo or PayPal payment reported to the IRS?
Under the Biden administration’s US bailout plan, taxpayers must file a 1099-K for “gross payments for goods or services over $600.”
That means anyone receiving more than $600 as a business transaction through third-party payment apps like Venmo and PayPal must report the earnings as taxable income.
People who use the apps to sell a personal item or transfer money to family and friends do not need to report the transaction.
The relevant transactions are documented by the third-party payment platform, and the taxpayer receives a 1099-K form from each of the companies through which they transacted.
The form shows how much the business account has earned through its services, along with a breakdown of monthly earnings.
Payment platforms have urged customers to keep copies of their transactions and to check forms to ensure the amount is correct, as inaccuracies could lead to an IRS investigation.
On Tuesday, the IRS reminded taxpayers that the filing threshold for 1099-K forms would be lowered from $20,000 to $600.
The number of transactions that trigger receipt of a form will also be reduced from 200 to 1.
According to the IRS, taxpayers covered by the new law will receive a 1099-K form from each of the third-party payment companies through which they transacted business.
Anyone who believes they have received the form in error is encouraged to contact the payment company for a correction.
Concerns about the tax change have risen, fueled by Republican lawmakers who suggested people who made money outside of business transactions could be affected.
“If you sold a couch, resold tickets for the price you paid, or just did some extra work on the side, you could trigger closer scrutiny from the Internal Revenue Service (IRS),” Republicans on the House Ways and Means Committee wrote earlier this week in a statement condemning the change.
While those who worked “on the side” would have to report their income if it exceeds $600 as it falls within the scope of taxable income, taxpayers who made money from selling a couch or tickets would be unaffected .
PayPal recently attempted to allay those fears by reiterating that average usage of their platform or Venmo’s would not expose taxpayers to IRS scrutiny.
“This doesn’t include things like repaying your family or friends with PayPal or Venmo for dinner, gifts, trips together,” PayPal said in a statement.
The company urged users who receive a 1099-K to ensure they are reporting their earnings accurately, as errors could lead to an IRS scrutiny.
“For the 2022 tax year, you should consider the amounts reported on your Form 1099-K when calculating gross receipts for your income tax return,” PayPal said. “The IRS will be able to cross-reference both our report and yours.”
The new policy aims to close the tax gap by taking in $8.4 billion from 2013 to 2021, according to the Joint Committee on Taxation.
It has been proposed as a means of funding America’s $3.5 trillion bailout, President Joe Biden’s signature social and climate spending program.
Tax experts have raised concerns that the IRS will not be able to process the estimated 20 million new 1099-K forms expected after January as the agency already faces major delays during tax season.
Earlier this year, President Biden signed the Anti-Inflation Act into law that would see the hiring of 87,000 new IRS officers.
Experts have estimated that the number of 1099-Ks alone that could be distributed is up to 20 million, causing major delays at the IRS
Lawmakers have already introduced bipartisan legislation to reverse the change.
Democratic Representatives Chris Pappas of New Hampshire, Cindy Axne of Iowa, Linda Sánchez, California, and Steven Horsford of Nevada are leading House legislation to raise the 1099-K threshold to $5,000, in what is known as the Cut Red Tape for Online Sales Act.
Sens. Maggie Hassan of New Hampshire and Kyrsten Sinema of Arizona are leading parallel legislation in the Senate.
Republicans Carol Miller of West Virginia in the House of Representatives and Rick Scott of Florida in the Senate are leading a proposal to reset the reporting threshold to what it was — $20,000 and 200 transactions — called the Saving Gig Economy Taxpayers Act.
US Representatives Michelle Steel of California and Senator Bill Hagerty of Louisiana are spearheading the Stop the Nosy Obsession with Online Payments (SNOOP) Act, a similar law that would restore reporting requirements to what they were.