Like most Americans, you’re probably cautious and confused by the impending tax season and the seemingly endless number of forms you need to deal with. Of course, if you use sites like PayPal, eBay, Zelle, and Venmo, then you might see the 1099-K form within the endless slew of paperwork.
Starting in 2022, users of online selling and micropayment platforms will need to report yearly income over 600 dollars using this form, which will require a lot of small-time online sellers to start paying more taxes on their earnings. This form is intended for freelancers paid through PayPal, small online businesses who accept credit card transactions, and most other people who take online or credit card payments for goods and services. However, if you fall into one of these categories, not all of your online transactions are taxable. If you frequently use sites like Venmo for purposes outside of your business, then the IRS will probably confuse your personal payments for business transactions.
How do you make sure that you don’t pay more taxes than you legally owe?
The most important step is to document all of the transactions you’ve made using online selling and payment services. You need to find out when each transaction occurred, how much money changed hands, and most importantly what the transfer was about in the first place.
There are many transactions that the IRS is not supposed to tax you for. If you decide to sell something on eBay for less than you bought it, then the transaction isn’t taxable. You aren’t making profit, you’re just getting a little money from that old book you never read or that DVD player that’s been gathering dust for years.
If you’re sharing an apartment with a roommate (and who isn’t nowadays?) and they’re sending their rent via a service like Zelle or Venmo, then the IRS might think that your roommate is paying you for a taxable good or service. Splitting rent with a roommate usually isn’t taxable, and you’ll need to inform the IRS about your rent splitting.
Although this is something you can handle yourself, it’s best to let your accountant deal with it. We can collect the right receipts/expenses and write up the right documentation. Usually, this is not a big deal. If you report to the IRS that your $700 of eBay transactions were a loss, or report that the $5,000 dollars you got from your roommate through Zelle was rent splitting, then the IRS is unlikely to see this as suspicious activity. It’s just better to get ahead of it, and be proactive rather than reactive.
Of course, the best prevention to this problem is to avoid using services like Venmo if they aren’t related to your business. Have your roommate write you a check, make your friends give you cash if you’re all splitting a meal, and maybe sell your old junk at a yard sale. As archaic as this all sounds, it might be better than having another headache to deal with during the 2022 tax season.
Photo by Avery Evans