If you use Venmo, you may need a 1099-K tax form. here’s why

(NewsNation) – After years of using largely tax-exempt services like PayPal and Venmo, a change in Congress means millions more people could get an IRS form in 2023.

A 1099-K is a tax return form that deals with payment cards or third-party network transactions. Translation: Credit cards and services that receive money from someone else and give it to you.

Here’s what Congress changed, what it means, and why the form may not be correct.

History of the 1099-K

Prior to the 2022 tax year, the 1099-K was a way for independent contractors to report income. These professionals, which include “gig workers” such as Uber drivers, do not receive a W2 form because they are not full-time employees of the organization that pays them.

The key is that a 1099-K would only be triggered if someone made at least $20,000 out of 200 trades. Continuing the Uber example, that would mean the driver collected $20,000 from at least 200 rides.

Congress changes

In 2021, Congress expanded the Form 1099-K reporting requirements to include settlement entities such as Venmo, PayPal, Cash App, and more. Lawmakers said this was to ensure taxable income did not slip through the cracks.

They also reduced that threshold from $20,000 on at least 200 trades to $600 on at least one trade.

In short, many more people can expect 1099-K forms from Venmo and similar services. This begins in the 2022 tax year, which means that the first forms will be sent out in the first weeks of 2023.

Let’s say you start a lawn mowing business on the side. You charge $30 per cut, and to make it easier for your customers, you tell them to send you the money via Venmo.

It’s been a busy year – you cut five lawns a weekend for 20 weekends, which amounts to $3,000. That flies way below the old reporting standard, but now Venmo is forced to hand you a 1099-K form because it paid you over $600.

Technically, a “secondary stampede” still represents taxable income. The IRS is now looking harder.

Is there anything I can do?

First, you should know that just because it’s on a Form 1099-K doesn’t mean it’s taxable income.

If you sell something at a loss, you don’t have to declare the product. For example, let’s say you’ve just purchased a new dining set, but need to throw out the old one to make room. If you sell it on Venmo for $600, but that’s less than what you bought it for, you can ask Venmo to issue a correction.

Gifts or reimbursements are also not taxable, but may trigger a 1099-K in total. You should contact the organization that gave you the 1099-K to clarify it.

Unfortunately, clearing it up can also involve trying to speak directly with the IRS. As of spring 2022, they are able to answer about 20% of the calls they receive due to staffing and logistical issues.

Plus, independent contractors can accidentally report their income twice if they’re not careful. Let’s say you’re a wedding photographer who accepts payment through Venmo. When you prepare your taxes, you’ll probably already be reporting your earnings as income, and the 1099-K may show up as an extra, even if it’s the same payment.

Are certain services exempt?

All payment processing services are included in Congress Change. However, transactions between banks are exempt. As such, Zelle is a way to avoid these new regulations.

Zelle is a messaging service that tells banks where to send money. He never holds any money himself. Therefore, reimbursing your roommates with Zelle will avoid triggering a 1099-K.

Moreover, there is always cash.

That said, it is illegal to hide taxable income. The wedding photographer and amateur landscaper in the examples above must still notify the IRS of the money they have earned, even if their clients pay them via Zelle or cash.

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