What Do New Payment App Regulations Mean for Taxpayers?

You may have heard about new tax reporting rules for businesses using third-party payment apps such as PayPal, Cash App, Venmo, Zelle, etc. This has caused some confusion for app users, but we’re here to help you understand how it will (or won’t) affect your taxes next year.



What’s changed?

Until this year, payment platforms were not required to report business transactions to the IRS unless you made at least 200 separate transactions totaling at least $20,000 in a calendar year.

Beginning Jan. 1, 2022, these thresholds dropped drastically — as a new tax rule, payment apps now must report business transactions totaling $600 or more in a year, regardless of the number of transactions you made.

You’ll receive Form 1099-K from the payment app if you meet this threshold. This form is an informational tax document detailing the gross amount of all your reportable transactions.

Why did this change happen?

The new tax reporting requirement is part of a provision in the American Rescue Plan passed in 2021.

Many people turned to side hustles during the pandemic to fill their time and make some extra cash while stuck at home. With the gig economy growing, this new regulation aims to lessen the amount of unreported and underreported taxable income from individuals and small businesses.

Will this impact me if I only use payment apps for personal transactions?

The new law only affects business app users who accept payment cards (credit or debit) or use third-party payment networks (PayPal and similar apps) for the payment of goods and services.

If you only use payment apps for personal transactions between family and friends — think reimbursing a roommate for your half of the rent or your share of expenses during a night out — you should be in the clear.

Some apps like PayPal and Venmo even allow users to select a designated “friends and family” category when making a transaction to avoid it potentially being flagged as a business payment.

Will I get a 1099-K if I sell items on eBay or other online marketplaces?

You will receive Form 1099-K if your sales reach $600 or more on eBay or similar platforms, but you only need to pay taxes on any profits you make. If, for example, you bought a new lawnmower for $1,000 last year and you sell it on eBay for $700, you won’t have to pay any income tax on the sale.

Gifts, reimbursement, and selling personal items at a loss are excluded from the new reporting regulations. These types of transactions are generally excluded from your gross income and are not subject to income tax. So, if you only use payment apps or online marketplaces for these reasons, you don’t need to worry.

What happens if a payment app sends me a 1099-K for a nontaxable transaction?

Even though personal transactions between friends and family don’t need to be reported, it’s possible you may receive a 1099-K from a payment service app for a nontaxable transaction.

Freelancers who use these apps, for example, might get a 1099-K from the payment app as well as a 1099-NEC or 1099-MISC from their client for the same transaction. In this case, it’s up to you, the taxpayer, to let the IRS know the tax form you received was for a nontaxable transaction.

Keeping your business finances separate from your personal finances is a good rule of thumb for all business owners. To limit the possibility of incorrectly receiving a 1099-K, always make sure to keep your personal and commercial transactions separate on payment apps and don’t accept any nontaxable payments via debit or credit cards.

If you want to read up on this issue further, check out this helpful FAQ page from the IRS about the new payment card and third-party app requirements.

Will this increase my taxes next year?

Some people may mistake this for a new tax, but tax laws have not changed — only the reporting regulations. Income made in exchange for goods and services has always been taxable; now, there’s just a bit more paperwork required.

Form 1099-K doesn’t change how much you pay in taxes. Rather, it’s the equivalent of the payment app saying, “FYI, these were your taxable transactions this year, so don’t forget to report that income.”

If you’ve been correctly reporting your income, you shouldn’t see any significant changes to your taxes next year. But if you’re new to the gig economy or you’ve been flying under the IRS’s radar because you haven’t received a 1099-K in the past, it might be a good idea to crunch some numbers and figure out how your taxes could be affected.

Why did I get a 1099-K for the 2021 tax year?

The new rule did not go into effect until Jan. 1, 2022, which means the change will begin with your 2022 income tax return that you will file in 2023.

However, some states have already implemented the new reporting regulations. If you live and work in any of the following states, you may be getting a 1099-K this year:

  • Arkansas
  • Illinois
  • Massachusetts
  • Washington D.C
  • Maryland
  • Mississippi
  • Missouri
  • New Jersey
  • Vermont
  • Virginia

How do I report my 1099-K transactions on my tax return?

You should report your 1099-K business payments as you would typically report your business income. Depending on your business structure, you should use Schedule C or Forms 1120, 1120-S, or 1065.

Do I need to do anything else?

If you’ll be receiving Form 1099-K next year, app providers will reach out to let you know if they need any additional info from you, such as your employer identification number (EIN), taxpayer identification number (TIN), or Social Security number (SSN).

It’s also a good idea to make sure the name you use on your payment app matches the name the IRS has on file for you. This goes for individual names and legal business names. Name discrepancies could cause complications, which is the last thing anyone wants to deal with during tax season!

The post What Do New Payment App Regulations Mean for Taxpayers? appeared first on TaxAct Blog.



from TaxAct Blog https://ift.tt/aDHiRxO
via CFO Blog

Comments

Post a Comment

Popular posts from this blog

Just Married: How to Fill Out Your W-4

Image
Big life events often trigger tax changes, and getting married is one of them. Though often overlooked, one of the most important steps you should take after getting married is updating your Form W-4 with your employer. Should I fill out a new W-4 when married? Yes! Your W-4 tells your employer how much tax to withhold from your paychecks. If you continue to list “single” on your W-4, your employer will likely withhold more tax from your paychecks than they would if you checked “married.” Updating Form W-4 will ensure you and your spouse have the right amount of taxes withheld, potentially giving you more money in your pocket throughout the year. How do I fill out a W-4 when married? When you get married, your financial situation may change, and you’ll need to account for this on your W-4. Here’s what you need to keep in mind. 1. Update personal information The name on your tax return must match your name on file with the Social Security Administration (SSA). If you plan on c
Read more

Should You Sell Your Investments Before the End of the Year?

Image
With the holidays just around the corner and the end of 2021 approaching fast, you might be wondering: should I sell my stocks before the end of the year? Maybe you’re looking for a little extra cash to help cover all the money you spent on holiday gifts, or perhaps you simply want to give yourself the gift of a potential tax deduction next year. Whatever the reason, you’re wondering how selling investments might affect your taxes. Don’t panic! We’ve compiled some useful information to help you decide what course of action to take. Paying taxes on your capital gains If you sell your investments for more than they’re worth because they’ve appreciated in the time you’ve owned them, you’ll report what’s called a capital gain. You can make capital gains from investments like stocks, bonds, and real estate. The amount of tax you are going to pay for capital gains depends upon whether you had a short-term or long-term capital gain. Short-term gains are for less than one year, and long
Read more

Tax Information for Different Tax Filing Stages

Image
The tax information you need all in one place. We’ve put together a master list of helpful articles for your tax situation, whether you’re preparing to file, in the process of filing, or waiting for your refund. If you’re self-employed, we have a section for that too. Let’s dive right in. Individual filers Stage 1: Preparing to file Organize Your Way to Tax Day: 5 Steps for Success : Get ahead of that pre-filing stress and set yourself up for success this tax season with these tips for getting organized. Tax Preparation Checklist : Not sure what information and tax documents you’ll need to have handy when filing? This checklist will help ensure you have everything you’ll need to complete your income tax return. Top 6 Tax Changes You Should Know About for 2022 : What’s changed from last year? Here are the top six changes you should be aware of, including changes to the Child Tax Credit, Earned Income Tax Credit, and more. Top 7 Reasons to Switch to TaxAct : Why file with TaxA
Read more