Sold $600 on Peer-to-Peer apps? Expect a new tax form | Business
Next year, many people using peer-to-peer payment apps to sell goods and services – including gig workers, landlords and small business owners – will receive forms for the first time. 1099-K.
Indeed, new reporting requirements in the American Rescue Plan Act of 2021 take effect: Starting January 1, 2022, PayPal, Venmo, Cash App and other peer-to-peer payment apps must report transactions. businesses totaling $600 or more per year. to the Internal Revenue Service.
To clarify, this is not a tax change; it’s a gear change. All taxable income must be reported to the IRS, regardless of platform or volume, whether or not you receive a Form 1099-K in the mail, an informative tax form that includes credit card payments and online payments.
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If you are expecting a 1099-K next year, there are steps you can take to prepare. The most important thing to know before you receive one of these forms, even for a small amount of money: don’t ignore it. This could result in penalties.
Which businesses are affected?
This new reporting requirement affects all commercial 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 business.
“This reporting information will help the IRS enforce compliance,” said Susan Allen, senior tax practice and ethics officer at the American Institute of CPAs, via email. Allen notes that all income from a business or self-employment is “fully taxable and must be reported on the tax return, even if it is less than $600.”
This change affects transactions starting January 1, 2022 and will impact tax returns filed in 2023. Users who meet the income threshold, which was previously a minimum of 200 transactions and $20,000, will receive the 1099-K form of the peer-to-peer platform.
One notable exception: The Zelle Money Transfer Network, 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 holds no funds.
What does the 1099-K include?
Form 1099-K will show your total income in gross reportable transactions and does not take into account credits, fees, refunds, or discounts. You will need to clarify these differences for the IRS.
If you qualify for a 1099-K, you should receive one electronically or by mail by January 31 of the following year. “You will need this form when you file your return,” says Allen – and you are required to report the information on it.
When you reach the $600 threshold for goods and services payments, you will be required to provide an Employer Identification Number, Social Security Number, or Taxpayer Identification Number through your user account if you do not haven’t already done so. If your identification number cannot be verified, you will need to fill out Form W-9 instead.
If you sell a personal item at a loss, even if you do so regularly, you are not required to report it as income. However, peer-to-peer platforms don’t know how much you spent on your sofa, for example, so if you sold your sofa at a loss, the transaction may show up on your 1099-K as taxable income. It is therefore especially important to keep records of your transactions and report them accurately to the IRS so that you can correct your 1099-K if necessary.
Do personal transactions count?
No. Even if you use your account for business and personal transactions, only business transactions should be listed on Form 1099-K. Transactions classified by payment apps as “personal” are not considered taxable income. These include money received as gifts, refunds from friends, and using apps to split rent or dinner. PayPal and Venmo both require users to select “Friends and Family” or “Goods and Services” for every transaction; only 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 does not provide purchase protection for this type of transaction, so sellers and buyers cannot be reimbursed for erroneous or fraudulent charges.
How to Prepare a Small Business for 2023 Taxes
With increased monitoring of small business income, it’s more important than ever to accurately record your payments and expenses.
Create a professional account
Personal and business transactions are taxed differently and different fees are charged on peer-to-peer applications. Creating a separate business account can prevent your payments from getting mixed up and complicating your taxes.
PayPal and Cash App both offer business accounts with specific features for small business owners.
Use an accounting service
Third-party accounting software can help you organize your financial records so you’re ready 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 adjustments to your 1099-K (for example, if you sold items at a loss, refunded a customer, or deducted business expenses, such as a payment processing fee), additional documentation is required. for the IRS to check. Documentation may include invoices, expense reports and receipts. This is especially important for business expenses, which cannot be used as a tax deduction without proper justification.
If a client pays you through a peer-to-peer application, you may also receive a 1099-NEC for self-employment and self-employment. Tracking your payments ensures you don’t report the same income twice – through the 1099-NEC and 1099-K – and pay unnecessary taxes.