If you’re earning more than $600 in business income through a digital payment platform (think PayPal, Venmo, Cash App, etc.), the IRS wants to know about it.
A new rule took effect Jan. 1 that requires digital payment services to report those totals to the IRS. The change, which is part of the American Rescue Plan, does not impact your 2021 tax return due this year.
It’s a big shift. Prior to this legislation, third-party payment platforms were only required to report if a user had 200 commercial transactions totaling $20,000 or more in a year.
“This new rule is an attempt to get a grasp on the earnings that exists in the marketplace, especially with so many payment options available now,” said Michael Lane, consumer product manager overseeing digital payments at BOK Financial®.
Digital payments have gone mainstream. In 2021, 82% of Americans regularly used digital payments, according to McKinsey’s 2021 Digital Payments Consumer Survey.
That’s up 10% from just five years ago, and includes browser-based or in-app online purchases, in-store checkout by phone and person-to-person payments.
“We expected growth in the digital payments space over the past few years, but the pandemic accelerated that growth even more,” Lane said. “We can’t attribute it all to the pandemic, but user adoption has grown significantly more than anticipated.”
Keep good records
There’s been a lot of buzz online about the new rule as consumers and small business owners try to decipher what it means.
"Small business owners, freelancers, those with a side hustle and others who accept digital payments for goods or services, should be aware of this change and step up their recordkeeping for 2022,” Lane said.
If you’re self-employed, you should already be reporting and paying taxes on your income, regardless of how you receive payment. This is just a reporting change so the IRS can have more visibility into transactions made through payment apps, which could go unreported.
“Be sure you have documentation to match what they are reporting, which can be used to validate and/or audit what has been reported to the IRS,” Lane added.
At the end of the year, the third-party payment companies will issue a 1099-K tax form if you earn more than $600 in income from goods or services.
Another tip is to keep things separate. “If you have your own business or a side contracting gig, it’s always a good practice to maintain separate personal and business accounts and records,” Lane said. “A lot of people don’t realize that banks like ours even offer free small business accounts that would help you keep your business transactions separate.”
No change for personal use
Don’t fret! Splitting the bill for a weekend getaway or monthly rent with your roommate won’t be affected by this new rule.
“Person-to-person payments will not change,” Lane said. “However, consumers should just pay attention to the additional questions being asked when you go to make a payment—they are different for each provider.”
When you make a payment or send money using one of the apps, you may be asked to select from statements like, “Yes, I know this person” or “This is a payment for a good or services.”
In addition, if you’re buying and selling goods on an online marketplace, be aware of the new rule. There are nuances around selling items at a loss and the IRS may require documentation of the original purchase to prove it. Note to self: Keep all large purchase receipts.
Information in this article should not be construed as tax advice and is offered for general informational purposes only.
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