If you are using a 3rd party payment app - you might be getting a tax form from uncle sam!
PayPal, Venmo, and other Cash apps - We all have been using them to transfer money to a friend, pay for cleaning services, dog walking, baby sitting, purchase of goods or services... well, the new rule is out, and this is what I have for you!
Effective January 1st, 2022 - The IRS has updated a new law that could affect many folks - this includes anyone who is receiving money of $600 or more during a calendar year for goods and services using Venmo, Paypal and other 3rd party payment apps.
Before implementing this new rule, the IRS required reporting income was on form of 1099 K - and had a threshold of $20K or more, and with more than 200 transactions during the calendar year.
Now IRS lowered the threshold from 20K to $600 per calendar year - using form 1099-K as a reporting form.
This rule is a result of the American Rescue Plan, signed into law back in March By President Biden, which revised the tax reporting requirements for third payment networks.
This new law applies to most third party networks, except for Zelle which is said to not subject to this law, because according an email sent by the network operator of Zelle "Early Warning Services LLC," that Zelle doesn't provide funds, but rather provides messaging between financial institutions and people making the payments. Therefore Zelle is exempt (at least for the time being)
Good practice & Record-keeping
Good news is that there are a few things to keep in mind and implement to reduce your taxable income.
Practice good record-keeping and stay organized.
Since your form 1099_k may include both taxable and non-taxable income, practicing good record-keeping is essential.
You may want to consider organizing all electronic versions of the following items (as well as paper filing incase your computer or cloud documents get lost or computer decides to retire on you unexpectedly)
Monthly Bank Statements (they are typically generated on the 1st of each month)
Description of all the income received
If you are a business owner, it is important to separate third-party payment accounts for your business and personal transactions.
Because if you own a business, get paid for goods and services and operate under your personal SSN # instead of your EIN #, your 1099K will report you SSN not your EIN - and this will affect your tax return - because whomever received the 1099-K must report that income on your tax return - so plan accordingly.
IRS explains in the publication 525 - which I will link it below in the show notes, the obligation extends even to profits from sale of personal items or hobby collectibles.
So if you purchase a piece of furniture for $100, then turn around and sell it for $500, then you owe takes on that $400 dollars - in other words you will owe taxes on the gain.
Nuggets of wisdom:
How to reduce your tax liability
For instance, if you are a dog-walker, you are able to claim certain deductions (expenses you had to incur from to make that taxable income).
What I mean by this - is if you spent a whole day pet sitting, but had to grab lunch, then that lunch would be a deduction expense because you are actually working and can count towards reducing your taxable income made that day.
Or you can track you mileage that was used for business.
These are only two examples of deductions available, and there are many more, therefore I cannot stress enough how essential it is to practice solid record-keeping of all your expenses, income, mileage logs, etc.
I would highly recommend setting yourself up for success by getting an accounting software for efficiency and transparency.
In summary, if you are using 3rd party payments apps, new tax law states you will receive a 1099K for any goods or services received of $600 ore more during calendar year.
Impacting your tax return 2022 filed in 2023.
Forms will be available no later than January 31st, electronically via your 3rd party payment application.
Establish a good record-keeping practice
Separate business and personal accounts
Use the correct SSN versus EIN numbers when setting up new 3rd party payment apps.
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I am Yasmine Belle - Your Tax Boss @the modern CFO Podcast
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