New tax rules might apply to you if you're getting paid on Venmo, Cash App

If you use payment apps like Venmo, PayPal or CashApp, the new year ushered in a change to an IRS tax reporting rule that could apply to some of your transactions.

The new rule, which took effect January 1, doesn't impose any additional taxes on payment app users. But it does make it harder for someone to evade existing taxes owed if they're getting paid through an app for business transactions.

Payment app providers now must issue you and the IRS a Form 1099-K on your business transactions if, combined, they total more than $600 a year. It used to be they only needed to do so if you had more than 200 business transactions in a year that totaled at least $20,000.

A business transaction is defined as payment for a good or service, including tips. So it does not include personal transactions, such as being reimbursed by a friend for dinner or receiving money to pay for a group gift.

The new requirement -- included in the American Rescue Plan, which was signed into law last year -- will apply to tax year 2022 and beyond. That means the first 1099-Ks issued under the new, lower threshold won't go out until early 2023.

But look out for communications from your app provider about the change and what, if anything, you'll need to do, such as provide more information to the company or better identify the nature of your transactions.

"[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.

The IRS will begin accepting tax returns, and unlike the past two years, there will be no COVID-19 extensions.

Venmo, for instance, has an updated FAQ that notes "customers may receive an in-app notification or email ... asking to confirm the information they use when filing their taxes. ... By providing this information, customers will be able to continue using their Venmo account to seamlessly accept payments for goods and services without any issue in 2022 and beyond."

When they go to send a payment to someone, Venmo users should see a toggle at the bottom of their screen that lets them indicate whether the money being sent is for a purchase of goods or services.

PayPal, which owns Venmo, is offering similar guidance for users of its app, a company spokesperson said.

Square's Cash App includes a partially updated page for users with Cash App for Business accounts. On it the company notes, "this new $600 reporting requirement does not apply to personal Cash App accounts. Instead, it only pertains to Cash for Business accounts, and applies only to payments received in 2022."

CashApp has not replied to requests for comment on how it will handle reporting for accounts in which users might mix personal and potentially reportable business transactions.

Experts say it's important to file your taxes early this year, as COVID delays are likely again.

As for anyone used to making a little money on the side by occasionally renting out their place on Airbnb, or selling some handmade goods on Etsy, the new $600 reporting threshold will affect you, too. Those online platforms are likely to issue you and the IRS a 1099-K as well.

But anyone who uses The Zelle Network -- which sends money directly between US bank accounts -- will not receive a 1099-K for business transactions because Zelle's parent company, Early Warning Systems, said Zelle is exempt from the reporting rule and issued an FAQ on the matter.

"The law requiring the issuance of forms 1099-K applies to third-party payment networks that handle the settlement of funds. Payments between friends and family, and eligible small businesses sent through the Zelle Network are not subject to this law because Zelle facilitates messaging between financial institutions, but does not hold accounts or handle settlement of funds," Early Warning said in an emailed statement.

But here is the key thing to keep in mind in every circumstance: Whether or not your payment app or any other electronic payment platform you use issues a 1099-K to you, you still must keep good records of your business transactions and pay whatever taxes you owe on your income-generating sales of a good or service, including tips.

And if you do get a 1099-K from a third-party payment provider that is incorrect -- perhaps because that old furniture you sold when you moved went for less than you paid for it -- it will be on you to document to the IRS why the money you received is not taxable income.

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