Third-party electronic payment networks, like Venmo or PayPal, have helped make transactions easier for consumers and small businesses alike. In today’s on-the-go world, these quick, easy and contactless transaction options are useful.
If you’re using these apps to collect payments from customers or clients (or to pay your own vendors), you should know that these payment apps will be required to report users’ business transactions that occur from Jan. 1, 2023 and on to the IRS if the aggregate transactions total $600 or more in a single year. This reporting change was due to take effect on Jan. 1, 2022 and apply to the 2022 tax season, but the IRS delayed the change by one year to give taxpayers and tax pros more time to get up to speed and ensure a smooth transition for tax season 2023 (the taxes filed in early 2024).
You may have questions about this expanded reporting. We answer four common questions to help you prepare for what is ahead with this change.
Headlines about this change sent consumers across social media into a panic, as they may use the app to share bills between roommates or more easily divide a check from a recent dinner. Those transactions are not becoming taxable. This reporting requirement is focused on business transactions, which are defined as payment for a good or service.
A person receiving income from goods or services, such as payments for a product or tips, has been and will remain responsible for reporting such income to the IRS, which may be taxable in many instances.
The goal of expanding the reporting rule is to crack down on unreported taxable income. For business transactions prior to Jan. 1, 2023, payment app providers are only required to report to the IRS (via a 1099-form) if the individual account had at least 200 business transactions in a year and if the gross payments met a minimum threshold of $20,000. Due to the delay on the reporting change, these are still the thresholds that will apply in tax season 2022.
This rule now applies to the 2023 tax year, meaning that you will likely not notice any changes to your taxes prior to filing your 2023 taxes in 2024.
If you have properly reported your business income all along, you should not expect to see any major changes based on this rule alone. There are potential headaches that may accompany this change, such as if the electronic payment network in question is having difficulty deciphering taxable and nontaxable income through the app. For example, if you charge your clients for a service through a payment app and also split rent with your roommate, the payment provider may issue a 1099K that includes all of the transactions you’ve made and you would need to work with a tax professional to differentiate taxable income and nontaxable payments on your return.
Similarly, freelancers or other contractors that receive 1099 forms from clients may end up with duplicative 1099 forms from a payment app they use. As with the above, it is best to consult your accountant and a business tax professional to ensure that your income reporting is accurate and these matters get resolved in a way that accounts for your unique situation.
You may be asked by these third-party payment apps to provide information, such as your EIN or ITIN if they do not already have that information. Some users have already been asked to provide this information to continue using payment apps.
Those most heavily impacted will be individuals who conduct business on payment apps, particularly if that income has not been reported to the IRS properly by the individual tax filer. It is possible that customers or clients who meet the minimum threshold for this new rule may receive a 1099 form for a nontaxable transaction. In those cases, working with a tax professional is best to resolve these issues in a way that takes into account individual income tax circumstances.
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