Do you use third-party payment apps? Be aware of new IRS reporting requirements.

By |2022-01-17T20:02:09+00:00January 15th, 2022|Taxes|

“You didn’t get a deduction for that bedroom set when you bought it. But if you sell it at a garage sale, you might wind up with a tax bill unless you’re careful”- Gary Stewart

Starting January 1, 2022, anyone receiving $600 or more in payments for goods and services through third-party payment companies (Paypal, Venmo, Zelle, and others) will have those payments reported to the IRS. The new requirement impacts your 2022 tax return filed in 2023.

The Internal Revenue Service now wants to know who uses third-party apps and exactly how much they send and receive.

Previously, the IRS only required reporting of gross payments that exceeded $20,000 and more than 200 transactions within the current year. Starting in January, however, the Biden American Rescue Plan has lowered the threshold to just $600.00. It would help if you understood that this is not a per-transaction amount. The new rule kicks into effect when total transactions exceed $600.00.

While it has always been the law that Americans must report all money earned from goods and services sold, including part-time work, the post-COVID gig economy has Uncle Sam worried that too much income might be going untaxed. It’s easy to see how this requirement could trap a lot of innocent taxpayers who are not attempting to evade taxes but who just aren’t keeping track of additional income sources, such as babysitting or yard work gigs.

While many argue that the requirement does not create a new tax but only enforces the existing law, there are still concerns, especially regarding financial privacy and the added burden placed on financial applications. If you are like millions of Americans and use third-party financial applications, you need to pay attention now or risk owing money in taxes later.

How to avoid the trap

Use separate third-party accounts for your business and personal accounts. Having different accounts for your business and private transactions will make your life easier come tax time. Separating accounts could also potentially reduce your chances of an audit.

Keep accurate records of all transactions. Record keeping has always been crucial to avoiding overpayment of taxes.

However, the new third-party app reporting requirements have upped the ante for failure to keep good records.

It’s up to you to monitor your accounts regularly, keep all receipts, and document every legitimate business purchase and deduction. While it’s true that certain types of transactions are considered non-taxable, good recordkeeping can keep you out of trouble should there be an audit.

Current non-taxable income items include:

  • Money received from a friend or family member as reimbursement. For example, you go out for coffee and donuts as a group. One person pays the entire bill, and the other participants send him their share via an app.
  • A roommate’s share of rent or utilities is usually not taxed.
  • Money from a relative or friend given as a gift is generally non-taxable.
  • Repayment of money loaned to you by a friend or family member is non-taxable.

If you have any concerns about whether an item is subject to tax, you should consult a tax planner, CPA, or other financial professionals.

What is Form 1099k?

Beginning on January 1, 2022, third-party payment apps will send their users Form 1099k to record income received electronically by January 31 of the following year.

Any apps you currently use may ask you to provide or verify additional information such as your Individual Tax Identification Number (ITIN), Social Security Number, or Employer Identification Number (EIN). Form 1099k will include payments from credit cards and any online payments. It can also include non-taxable income sources. When you file your income tax return, you must report all taxable income listed on Form 1099k.

Summing it up:

Third-party apps such as Paypal, Venmo, Zelle, and others are convenient, quick methods of receiving and sending cash. However, changes in IRS regulations mean that you will need to be exceptionally vigilant when using them or face potential tax liabilities. If you want tax time to be a bit easier, always document and accurately record every transaction, especially those done through an online payment application.

 

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About the Author:

As a retirement and income planning specialist, Gary has spent over 40 years assisting retirees and those near retirement in protecting their savings, reducing income taxes, and taxes on Social Security benefits as well as creating retirement income guaranteed to last a lifetime. Gary has extensive knowledge in retirement planning, portfolio and asset management, insurance, and real estate. Gary’s expertise coupled with a keen sense of the financial markets grew his client base in the thousands. Website: stewartwealthadvisors.com

Office: (804) 864-5910 | Stewart Wealth Advisors