The new IRS tax rules might impact you, especially if you frequently use payment services like Venmo or Paypal. All common digital payment services, such as Venmo, Paypal, Square, Cash App, and Zelle are changing, starting on January 1, 2022. Obviously, if you’re an independent vendor who accepts and/or charges using these tools, this is especially pertinent, but even people who casually use the apps throughout the fiscal year will be seeing changes in how they report their income.
In late December 2017, the Internal Revenue Service (IRS) announced its intention of taxing certain payments made through digital wallets. However, prior to the upcoming year, all the IRS asked for was a 1099-K form and it was only for businesses that accrue 200 transactions or $20,000 in gross payments.
This is changing.
Starting January 1st, payment apps will automatically notify the IRS of transactions that exceed $600 or more. Sound familiar? This is akin to all contractors and 1099 employees who must report income under over $600 for any one project/client.
For people who use these apps casually, say for unique purchases from online stores or between friends, it’s unlikely you have much to worry about.
Technically, this change shouldn’t impact business owners or the self-employed either. As the IRS is wont to point out, you are responsible for reporting your income. So even if you do something unintentionally, the defacto ruling is, it’s still your fault. While apps and the IRS are enforcing these changes as of January 1, realistically, all business owners and independent contractors should’ve been reporting their income from these apps already. The only people this will immediately impact are those who have not been reporting their income.
So will this affect me if I casually use these apps?
It’s unlikely… but it’s also why we prefaced this whole article by saying it is something to be mindful of. If you’re doing business with a CPA and paying them simply for their services for your personal taxes. If your CPA is unaware this is “personal” they may label the transaction as a “business” transaction. Then you become liable without knowing. This can happen with myriad other transactions as well, so consider this when you’re buying something off a “services” page (for instance).
In the meantime, if you have a business that accepts digital payments, but also use the apps casually between friends, then the best thing you can do is use one app (e.g. Venmo) for personal transaction and another (e.g. Square) for business transactions. Without this separation of transactions, your taxes could become exceedingly complicated.
When you receive payment through these services, they will be treated as cash transactions when tax time comes around. This can cause cause major issues down the road. Don’t ignore them until they become an unresolvable issue; instead, take steps now before things get out of hand.
Image by Ahmad Ardity