The Internal Revenue Service reminded taxpayers that they must report transactions exceeding $600 received via payment apps such as Venmo and PayPal.
The IRS posted an online explanation warning small businesses about the $600 threshold to receive Form 1099K for third-party payments above $600.
Third-party payment processors are required to report to the IRS any business transactions exceeding $600 in a calendar year. Payment apps used to be required to send users Form 1099K if they earned more than $20,000 or had 200 transactions in a calendar year.
The Democrats made the change when they passed the American Rescue Plan in March 2021 without any Republican votes. The form will now be activated for any transaction exceeding $600. This change is designed to curb Americans who evade taxes by failing to report the full extent their gross income. Critics say it amounts to government overreach at the worst, and could eventually hurt small businesses.
This new rule applies only to payments received for goods or services transactions. Venmo and PayPal are not allowed to be used to send gifts, rent payment, or reimbursement for meals to friends. Anyone who is paid money for selling personal items at a loss is also exempt. For example, $300 for a couch and $250 for a sofa, it is not taxable.
It is important to clarify that business owners must already report this income to the IRS. Because the IRS has a wider scope for the threshold, the new rule means that they will calculate how much business owners earned from cash apps.
The Form 1099K is used for reporting goods and services payments received by an individual or business in the calendar year. However, there are some exclusions from gross earnings that are not subject to income taxes, such as amounts sold at a loss, amounts sent to reimburses, and amounts sent to gifts.
Cash apps will be required to send users who meet new requirements Form 1099K for electronic or postal transactions.
In order to correctly report transactions, the apps might ask users for additional information. Users may be asked to provide their Employer Identification Numbers (EIN), Individual Tax Identification Numbers (ITIN) and Social Security Numbers (SSN) if they don’t already have it on file.