Next 12 months, many individuals utilizing peer-to-peer fee apps to promote items and providers — together with gig employees, landlords and small-business house owners — will likely be receiving 1099-K kinds for the primary time.
This is as a result of new reporting necessities within the American Rescue Plan Act of 2021 are taking impact: Starting Jan. 1, 2022, PayPal, Venmo, Cash App and different peer-to-peer fee apps should report business transactions totaling $600 or more per 12 months to the Internal Revenue Service.
To make clear, this isn’t a tax change; it’s a reporting change. All taxable earnings ought to be reported to the IRS whatever the platform or quantity, no matter whether or not you get a 1099-K type within the mail, an informational tax type that features funds from bank cards and on-line funds.
If you expect a 1099-K subsequent 12 months, there are steps you may take to arrange. The most necessary factor to find out about receiving considered one of these kinds, even for a small sum of cash: Don’t ignore it. Doing so may lead to penalties.
Which companies are affected?
This new reporting requirement impacts all enterprise transactions — funds for items and providers — on peer-to-peer fee platforms, together with PayPal, Venmo and Cash App. The guidelines apply whether or not you run a registered small enterprise or a seasonal facet hustle.
“This reporting information will help the IRS with compliance enforcement,” mentioned Susan Allen, senior supervisor for tax apply and ethics with the American Institute of CPAs, by way of e-mail. Allen notes that every one earnings earned by a enterprise or from self-employment earnings is “fully taxable and should be reported on the tax return, even if it is less than $600.”
This change impacts transactions beginning on Jan. 1, 2022, and can affect tax returns filed in 2023. Users who meet the earnings threshold, which beforehand was a minimal of 200 transactions and $20,000, will obtain Form 1099-K from the peer-to-peer platform.
One notable exception: The money-transferring community Zelle, utilized by main banks, doesn’t report transactions to the IRS, together with funds for items and providers.
The new regulation solely applies to third-party fee networks that deal with the settlement of funds. Zelle, which connects on to your financial institution, facilitates messaging between monetary establishments however doesn’t maintain any funds.
What does the 1099-K embody?
The 1099-K type will report your complete earnings in gross reportable transactions and doesn’t regulate for credit, charges, refunds or reductions. You’ll must make clear these variations for the IRS.
If you qualify for a 1099-K, you need to obtain one electronically or by mail by Jan. 31 of the next 12 months. “You will need that form when you file your return,” Allen says — and also you’re required to report the knowledge on it.
When you meet the $600 threshold for goods-and-services funds, you may be required to supply an employer identification quantity, Social Security quantity or particular person taxpayer identification quantity by your consumer account in the event you haven’t already achieved so. If your identification quantity can’t be verified, you’ll have to fill out Form W-9 as a substitute.
If you promote a private merchandise at a loss — even in the event you accomplish that as a constant facet hustle — you aren’t required to report it as earnings. However, peer-to-peer platforms don’t understand how a lot you spent on your sofa, for instance, so in the event you bought your sofa at a loss, the transaction could seem on your 1099-K as taxable earnings. This makes it particularly necessary to maintain data of your transactions and report them precisely to the IRS so you may right your 1099-K if wanted.
Do private transactions rely?
No. Even in the event you use your account for each enterprise and private transactions, solely enterprise transactions ought to be included on the 1099-K type. Transactions classed by fee apps as “personal” will not be thought of taxable earnings. These embody cash acquired as a reward, reimbursements from pals and utilizing the apps to separate hire or dinner. Both PayPal and Venmo require customers to pick out both “Friends and Family” or “Goods and Services” for every transaction; solely the funds categorised as items and providers will rely towards the $600 restrict.
And sure, you may technically ask your prospects to decide on the “Friends and Family” choice as a substitute. But PayPal actively displays accounts to forestall companies from evading charges and taxes on this method. The platform additionally doesn’t present buy safety for one of these transaction, so sellers and patrons alike can’t be reimbursed for mistaken or fraudulent prices.
How to arrange a small enterprise for 2023 taxes
With elevated scrutiny on small-business earnings, it’s more necessary than ever to precisely file your funds and bills.
Set up a enterprise account
Personal and enterprise transactions are taxed in a different way and are charged completely different charges on peer-to-peer apps. Setting up a separate enterprise account can maintain your funds from getting blended up and making your taxes more sophisticated.
Both PayPal and Cash App supply enterprise accounts with particular options for small-business house owners.
Use an accounting service
Third-party accounting software program will help set up your monetary data so that you’re ready for tax season. An accounting platform like FastBooks can join on to your PayPal account and observe your earnings and bills. Square, which owns Cash App, may also combine with a number of accounting methods together with FastBooks, Zoho Books and Xero.
Have backup documentation
If it is advisable to make any changes to your 1099-K — for instance, in the event you promote objects at a loss, have refunded a buyer, or in the event you’re deducting enterprise bills, similar to fee processing charges — extra documentation is required for the IRS to confirm. Documentation can embody invoices, expense studies and receipts. This is particularly necessary for enterprise bills, which might’t be used as a tax write-off with out correct substantiation.
If a shopper pays you thru a peer-to-peer app, you may additionally obtain a 1099-NEC for freelance and self-employment work. Keeping observe of your funds ensures that you just don’t report the identical earnings twice — by each the 1099-NEC and the 1099-K — and pay pointless taxes.