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Next year, many people using peer-to-peer payment apps to sell goods and services — including gig workers, landlords and small-business owners — will be receiving 1099-K forms for the first time.
This is because new reporting requirements in the American Rescue Plan Act of 2021 are taking effect: Starting Jan. 1, 2022, PayPal, Venmo, Cash App and other peer-to-peer payment apps must report commercial transactions totaling $600 or more per year to the Internal Revenue Service.
To clarify, this isn’t a tax change; it’s a reporting change. All taxable income should be reported to the IRS regardless of the platform or volume, regardless of whether you get a 1099-K form in the mail, an informational tax form that includes payments from credit cards and online payments.
If you are expecting a 1099-K next year, there are steps you can take to prepare. The most important thing to know about receiving one of these forms, even for a small sum of money: Don’t ignore it. Doing so could result in penalties.
Which businesses are affected?
This new reporting requirement affects all business transactions — payments for goods and services — on peer-to-peer payment platforms, including PayPal, Venmo and Cash App. The rules apply whether you run a registered small business or a seasonal side hustle.
“This reporting information will help the IRS with compliance enforcement,” said Susan Allen, senior manager for tax practice and ethics with the American Institute of CPAs, via email. Allen notes that all income earned through a business or from self-employment income is “fully taxable and should be reported on the tax return, even if it is less than $600.”
This change affects transactions starting on Jan. 1, 2022, and will impact tax returns filed in 2023. Users who meet the income threshold, which previously was a minimum of 200 transactions and $20,000, will receive Form 1099-K from the peer-to-peer platform.
One notable exception: The money-transferring network Zelle, used by major banks, does not report transactions to the IRS, including payments for goods and services.
The new law only applies to third-party payment networks that handle the settlement of funds. Zelle, which connects directly to your bank, facilitates messaging between financial institutions but doesn’t hold any funds.
What does the 1099-K include?
The 1099-K form will report your total income in gross reportable transactions and doesn’t adjust for credits, fees, refunds or discounts. You’ll have to clarify those differences for the IRS.
If you qualify for a 1099-K, you should receive one electronically or by mail by Jan. 31 of the following year. “You will need that form when you file your return,” Allen says — and you’re required to report the information on it.
When you meet the $600 threshold for goods-and-services payments, you will be required to provide an employer identification number, Social Security number or individual taxpayer identification number through your user account if you haven’t already done so. If your identification number can’t be verified, you’ll need to fill out Form W-9 as a replacement.
If you sell a personal item at a loss — even if you do so as a consistent side hustle — you are not required to report it as income. However, peer-to-peer platforms don’t know how much you spent on your couch, for example, so if you sold your couch at a loss, the transaction may appear on your 1099-K as taxable income. This makes it especially important to keep records of your transactions and report them accurately to the IRS so you can correct your 1099-K if needed.
Do personal transactions count?
No. Even if you use your account for both business and personal transactions, only business transactions should be included on the 1099-K form. Transactions classed by payment apps as “personal” are not considered taxable income. These include money received as a gift, reimbursements from friends and using the apps to split rent or dinner. Both PayPal and Venmo require users to select either “Friends and Family” or “Goods and Services” for each transaction; only the payments classified as goods and services will count toward the $600 limit.
And yes, you can technically ask your customers to choose the “Friends and Family” option instead. But PayPal actively monitors accounts to prevent businesses from evading fees and taxes in this way. The platform also doesn’t provide purchase protection for this type of transaction, so sellers and buyers alike can’t be reimbursed for mistaken or fraudulent charges.
How to prepare a small business for 2023 taxes
With increased scrutiny on small-business income, it’s more important than ever to accurately record your payments and expenses.
Set up a business account
Personal and business transactions are taxed differently and are charged different fees on peer-to-peer apps. Setting up a separate business account can keep your payments from getting mixed up and making your taxes more complicated.
Both PayPal and Cash App offer business accounts with specific features for small-business owners.
Use an accounting service
Third-party accounting software can help organize your financial records so you’re prepared for tax season. An accounting platform like QuickBooks can connect directly to your PayPal account and track your income and expenses. Square, which owns Cash App, can also integrate with several accounting systems including QuickBooks, Zoho Books and Xero.
Have backup documentation
If you need to make any adjustments to your 1099-K — for example, if you sell items at a loss, have refunded a customer, or if you’re deducting business expenses, such as payment processing fees — additional documentation is needed for the IRS to verify. Documentation can include invoices, expense reports and receipts. This is especially important for business expenses, which can’t be used as a tax write-off without proper substantiation.
If a client pays you through a peer-to-peer app, you may also receive a 1099-NEC for freelance and self-employment work. Keeping track of your payments ensures that you don’t report the same income twice — through both the 1099-NEC and the 1099-K — and pay unnecessary taxes.