Fact or Fiction: IRS tracks payments over $ 600 on Paypal and Venmo in 2022
If you own your own business or have a side business and get paid through digital apps like PayPal, Zelle, Cash App, or Venmo, income over $ 600 will now be reported to the IRS. A provision of the 2021 US bailout, which went into effect Jan. 1, requires third-party payment processors to report transactions received for goods or services totaling more than $ 600 per year to the IRS.
Prior to this legislation, a third-party payment platform would only report to the tax administration if a user made more than 200 business transactions and made more than $ 20,000 in payments in a year.
What does this mean to you? The main thing to know right now is that this does not apply to your 2021 tax return, which you will be filing this tax season. But that will apply to income you earn throughout 2022, which you report when filing in 2023. Here are four things to know about the new tax rule.
1. This is not a tax change, it is a change of declaration
If you are self-employed, you should already be paying taxes on your total income, regardless of how you receive your payments for goods and services. The new legislation isn’t a tax change – it’s a tax return change so the IRS can keep tabs on transactions made through payment apps that often go unreported.
Going forward, third-party payment companies will issue you with a 1099-K tax form every year if you earn $ 600 or more per year in income from goods or services. This tax form can include taxable and non-taxable transactions, especially if the account is both business and personal.
The IRS will also receive a copy of the tax form and will not rely solely on the self-report. “The IRS will be able to cross-reference both our report and yours,” Paypal noted in a November 2021 press release.
To make it easier to manage your business finances, we recommend that you create separate PayPal, Zelle, Cash App, or Venmo accounts only for your business finances.
2. The IRS Doesn’t Count the Money You Send to Family and Friends
Rumors have circulated that the IRS is cracking down on money sent through third-party payment apps to family and friends, but this is not true. Personal transactions involving gifts, favors or refunds are not considered taxable. Here are some examples of tax-free transactions:
- Money received from a family member as a holiday or birthday gift
- Money received from a friend covering his share of a restaurant bill
- Money received from your roommate or partner for their share of rent and utilities
3. Payment apps may ask you for tax information
Now that this new law is in effect, payment apps like PayPal can contact you to confirm tax information, such as your Employer Identification Number (EIN), Individual Tax Identification Number (ITIN), or your social Security number. If you own a business, you likely have an EIN, but if you are a sole proprietor or self-employed or self-employed, you will provide an ITIN or Social Security number.
4. If you sell personal items at a loss, you will not owe taxes.
If you sell personal items for less than you paid for them and collect money through third-party payment apps, this new law won’t affect you. For example, if you buy a sofa for your home for $ 500 and later sell it on Facebook Marketplace for $ 200, you won’t owe taxes on the sale. This is because it is a personal item that you have sold at a loss. However, you may need to show the original purchase documentation to prove that you sold the item at a loss.
Be sure to keep track of your purchases and transactions online to avoid paying taxes on any non-taxable income – and if in doubt, contact a tax professional for help.