If you are someone who utilizes the convenience of receiving money through digital apps like PayPal, Zelle, Cash App or Venmo, this information is for you. Effective January 1, 2022, combined earnings of $600 or more will now be reported to the IRS pursuant to a provision in the 2021 American Rescue Plan that was passed in March 2021, which directs third-party payment processors to report transactions received for goods or services totaling over $600.00 per year to the IRS. This is a significant difference from prior legislation which required third-party payment platforms to only report in excess of $20,000 in payments over the course of a year.
Furthermore, if you sell products on Etsy, or eBay, you will get a 1099-K form if you sell more than $600 worth of products. This new legislation not only applies to independent contractors who bill client’s directly, but to those who obtain clients through online hiring platforms like Upwork, Uber, Lyft, and many others. Likewise, the same goes for short-term rental hosts who use platforms like Airbnb or VRBO for bookings.
The good news is, this does not apply to your 2021 tax return; however, it will apply when you file your 2022 tax return in 2023. Here are a couple of things to know.
1. The law is not new, it has changed
If you are a business owner and have been accepting payments through digital apps, you likely have already been claiming this income on your taxes, and if not, you should have been. This new legislation is strictly a reporting change so that the IRS can keep track on transaction made through payment apps that often go unreported.
You may be wondering, how is this going to work? Here is your answer: starting January 1, 2022, third-party payment companies will issue you a 1099-K tax form each year if you earn $600 or more annually for good or services. The IRS will also receive a copy of the 1099-K; they certainly will not rely on self-reporting, and will cross-reference both your reporting and third-party payment companies reporting.
With this said, we recommend creating separate Zelle, Cash App, Venmo, or PayPal accounts to separate your business and personal transactions.
2. This doesn’t apply to money sent to family and friends
Don’t believe the rumors you may have heard. Personal transactions involving gifts, favors or reimbursements are not considered taxable such as money received for a birthday gift, or reimbursement from a friend to cover their portion of a restaurant bill, or even money received from your roommate to cover their share of the utility bill.
3. Selling personal items that have depreciated will not have an impact on your taxes.
Do you like to sell things that have been sitting around in your garage for months that you no longer need? The good news is, this new legislation will not impact you. If you sell a personal item that has depreciated in value, that is considered a loss and therefore you won’t owe taxes. For example, if you bought a new washer and dryer for $3,000 and sold it for $1,000, that is considered a loss and is non-taxable. We recommend that you keep documentation of the original purchase in case you ever need to prove that you did in fact sell the item at a loss.
4. Do not be surprised if third-party payment companies request tax information from you
Due to the new reporting requirements, third-party payment companies need to make sure that they meet their obligations to the IRS and may reach out to you to confirm your tax information, such as your employer identification number or social security number.
Make sure to keep a good record of your purchases and online transactions to avoid paying taxes on nontaxable income. American Credit Consulting is partnered up with a team of tax professionals who can help you make sure you are in compliance with the new legislation as well as make sure you aren’t paying taxes on transactions that are considered nontaxable. Give us a call at 888-588-2409.