Heads Up Side Hustlers—There’s a New Tax Law for Payment Apps
For many, payments apps like CashApp, Venmo, Paypal, and Zelle have become a normal part of life. While some of us may utilize them for transferring miscellaneous funds, like dinner with friends or a piece of furniture bought at a flea market, they’re are also a primary tool for creatives and entrepreneurs who don’t receive a traditional paycheck. That being said, the recent payment app tax changes are well worth noting. Here’s what you should know:
The new tax law is part of the American Rescue Plan, which was signed into existence last year. This means that since it applies to 2022 and beyond, the tax forms distributed under this new rule won’t go out until 2023.
So which tax form can you expect? If your business transactions in a payment app total $600 or more a year, the IRS will send you a Form 1099-K as a way to document your earnings. Keep in mind, this doesn’t include any new or additional taxes on top of what your app of choice may or may not require. It does, however, force accountability and make it difficult to avoid paying taxes and engaging in potentially illegal behavior. (Honesty is the best policy, right?)
If you’re not new to payment app laws, you’ll notice that this is a rather big decrease from the previous law, which only required a 1099-K for $20,000 and 200+ business transactions.
It’s also important to know what constitutes a business transaction. According to the IRS, that would be money for a service or good, tips included. So, you need not worry about taking those personal exchanges elsewhere.
Several payment apps are already communicating with customers about the tax update. For example, both Venmo and Paypal have updated their FAQs to reflect changes that align with the new policy.
“‘[Payment app providers] are relying on consumer prompts and interfaces to help consumers classify the reportable versus non-reportable transactions on the front end, and then [providing] educational pieces, like FAQs, to help the consumer understand the details of the new reporting requirements if they receive a 1099,’ said Scott Talbott, senior vice president of government relations at the Electronic Transactions Association.'”
Cash App let its users know that the law only applies to those with Cash App for Business, though it has yet to lay out how it will differentiate accounts that appear to mix personal and business transactions. Online platforms that host small businesses, like Etsy, will likely issue 1099-K forms too.
So far, Zelle is a major outlier, as its FAQs reveal that since it handles transactions between financial institutions and not individuals, it isn’t subject to this new law.
Long story short, if you use any of these payment apps for business transactions, double-check their policies and keep a handle on your finances so you can avoid surprises come next tax season. Check out the IRS FAQ page for more questions and answers around 1099-K forms.
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