In recent years, individuals and small business owners alike have embraced the convenience of the peer-to-peer payment trend. Apps such as Venmo, PayPal, Zelle, and Cash App have skyrocketed in popularity. Whether you're splitting the bill for a night out or receiving income for a freelancing gig, these third-party platforms take the complexity out of payment processing.
However, if you're accepting commercial payments on these apps, you'll need to make sure that you're reporting this income for tax purposes. Until now, it's been up to the business owner or freelancer to include this income on your annual tax return. However, starting in 2022, these digital payment services will be required to report business earnings that total more than $600 per year to the IRS.
Here's how the new tax reporting rules will work.
This change to tax reporting requirements is a little-known provision of the 2021 American Rescue Plan Act. Before the legislation, Venmo and other peer-to-peer platforms would report payments to the IRS only if a user had more than 200 commercial transactions and over $20,000 in payments throughout the year. The new law, which takes effect in 2022, will give the IRS access to much more detailed records of how businesses are using these popular applications to earn income.
It's important to note, however, that the new rule changes reporting requirements, not tax requirements. Freelancers and businesses have always been required to self-report any income received through these platforms. The change means only that the IRS will now be able to cross-reference reports from peer-to-peer payment apps against those from individuals and businesses.
What freelancers and business owners need to know.
For freelancers, contractors, and solopreneurs, the new rules mean that you'll want to be even more diligent about tracking income through digital platforms. Whether you're selling on Amazon, Etsy, or eBay--or accepting payments from freelance clients via Venmo or PayPal--you'll want to keep a record of all income sources and amounts.
Of course, payment providers will be tracking your transactions, too. In January 2023, you can expect to receive a Form 1099-K from each platform on which you've sold goods or services over the past year. To complicate matters, if you're a freelancer working for a company, you may also receive a Form 1099-MISC for the same income. In this situation, make sure to avoid double reporting the same income--an error that could result in both an unnecessarily expensive tax bill and a notice from the IRS. As always, keeping good records will help ensure that your tax return is accurate and that you don't overpay.
In addition to shoring up your bookkeeping practices, you may also need to provide tax information--such as your social security number, individual tax ID, or EIN--to payment service providers. If you haven't already, make sure to provide these details if you plan to continue selling goods and services through the apps.
What about personal transactions?
Wondering how peer-to-peer payment providers will tell the difference between your commercial transactions and the payment your friend sent for those tacos you split at lunch last week? While each platform may vary, most services will ask the payer to describe the purpose of the transaction so they can categorize it correctly.
Contrary to some of the rumors that have been circulating since the legislation passed, the IRS isn't concerned with the money sent through third-party payment apps to family and friends. Personal transactions, such as gifts, favors, and reimbursements, are not taxable and therefore do not need to be reported to the IRS.
Personal items sold at a loss aren't taxable.
Good news for fans of Facebook Marketplace: If you sell a personal item online for less than you paid for it, the money you collect isn't taxable because you sold it at a loss. Although, you may be required to provide proof of the original purchase price.
If, on the other hand, you have a side business reselling merchandise through a peer-to-peer payment platform, then your earnings will be reported to the IRS according to the new rules.
Generally speaking, keeping good records of your online transactions will help you stay compliant and avoid paying taxes on nontaxable income. If you need guidance on your specific tax situation, speaking to an accountant can help you navigate the new rules.