about your sideline if you earn more than $600 a year.
The sign on the barber shop door read "Cash Only Please!"
He wasn't sure, but he suspected that the reason behind the change in the accepted form of payment might have had something to do with the new income reporting requirements. In the past, payment options included apps like Venmo, PayPal, and Cash App.
To help identify tax traps, the IRS, effective January 1, began requiring all third-party payment processors in the United States to report payments received for goods and services of $600 or more annually.
This is going to be a jarring change for some self-employed people and people with side hustle.
For others who use such payment platforms for personal transactions, there is nothing to worry about.
"The government has been looking at ways to close that tax gap by making more transactions reportable to the IRS," said Eric Bronnenkant, head of taxes at online financial adviser Betterment. "The ultimate goal is a laudable one, which is to make it more difficult for people to underreport their taxable income."
Let's go over what you need to know about the new IRS reporting rule.
Will I pay taxes on the money I send to my friends if we split the cost of a meal?
There is a lot of confusion about the new rule.
You can still use payment apps to split a restaurant bill with friends or send birthday money to family members without generating a tax bill. The tax agency is trying to track the income received, not the transfer of funds between family and friends.
Under the pandemic-related American Rescue Plan, changes were made to the tax code related to what are called "third-party settlement organizations." These include companies like PayPal, Venmo, and Cash App, which accept payments for the sale of goods and services.
“Third-party information reporting has been shown to increase voluntary tax compliance and improve collections and evaluations within the IRS,” the agency says in an FAQ on third-party network transactions.
In the past, the threshold for reporting peer-to-peer (P2P) payments for goods and services transactions was quite high. Businesses must submit for gross payments greater than $20,000 and more than 200 transactions within a calendar year.
This threshold has now been lowered substantially.
If your business receives $600 or more in payments, regardless of the total number of transactions for the calendar year, payment processors must submit a 1099-K. This is the tax form used to report payments received by a business or individual for the sale of goods and services that were paid for through a third party network.
So yes, this includes the income you receive from the t-shirts you make and sell on Etsy or the house you rent on Airbnb.
By the way, Zelle says on its website that it is not subject to the new requirement, writing, "The law requiring certain payment networks to provide 1099K forms for information reporting does not apply to the Zelle Network."
Early Warning Services, the network operator behind Zelle, said in an emailed statement: “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 the settlement of funds.
Why is the IRS coming after my little secondary income?
This is not a new tax. It's a new reporting requirement.
Even if you hadn't received a 1099-K, you were still required to report any taxable income received through these platforms on your tax return.
Even if you hadn't received a 1099-K, you were still required to report any taxable income received through these platforms on your tax return.
The change won't affect the reporting requirement for 2021 tax returns. But casual workers or people with side hustle and bustle should expect to start receiving 1099-K forms for tax year 2022 early next year.
How will the platforms know that the money I am receiving is not commercial income?
The various platforms have been sending notices to people who use payment apps to accept business income that they need to accurately report their income and confirm their tax information.
Many payment apps have a way to differentiate between business payments and money sent as a gift or refund.
Cash App said on its website that business accounts with $600 or more in gross sales in tax year 2022 will qualify for a Form 1099-K. But it does not apply to personal Cash App accounts.
In its own FAQ, PayPal, which also owns Venmo, noted that it offers users the opportunity to tag their P2P transactions as personal or business-related.
"Users must select Goods and Services whenever they send money to another user to purchase an item," PayPal said.
It's still possible to receive a 1099-K in error, which will require you to explain to the IRS that the money is not taxable, Bronnenkant said.
Will I pay taxes on the money I make selling used items around my house?
Unless you're in the business of selling secondhand items, you won't pay taxes to get rid of old living room furniture or the bed you've had since college.
If you're selling personal items at a loss, the reports don't affect you, Bronnenkant said.
For example, if you bought a dining table for $1,000 and sold it for $600, this amount would not be subject to income tax or result in PayPal sending you a 1099-K.
Why shouldn't you just accept cash again?
Will people find a way around the new reporting rules? Probably.
But there are several reasons why you should report all of your income.
It's the law, and not reporting it could land the IRS in big trouble. Yes, the agency is overwhelmed, but woe to the person who finally gets caught!
There are a few other short-term and long-term advantages to reporting all of your income.
Your income is used to qualify for loans.
You may be excluding yourself from qualifying for some tax breaks, such as the earned income tax credit, Bronnenkant said. The EITC helps low- and moderate-income workers and families get a tax break. For 2021, a married couple with three children may qualify for the EITC if their earned income is less than $57,414.
In the long run, underreporting or not reporting your income can affect the amount of Social Security benefits you receive.
I understand that if you're working hard to make ends meet, you feel like you're not cheating to evade IRS reporting requirements. But keep in mind that underreporting could negatively affect your financial future.
Comments