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If you receive $ 600 or more in total payments for goods and services through a third-party payment network, such as Venmo, Cash App, or Zelle, those payments will now be reported to the IRS.
The new rule is a result of the US bailout enacted in March 2021 and will primarily affect business owners using third-party payment network providers. The IRS clamps down on payments received through apps, such as Cash App, Zelle, or Paypal to ensure that those who use third-party payment networks pay their fair share of taxes.
Previously, the IRS only required third-party payment networks to report payments that meet the following two reporting requirements:
- Gross payments over $ 20,000, AND
- More than 200 transactions in the current year.
As of January 1, 2022, third-party payment networks will be required to send users Form 1099-K for transactions made by mail or electronically. This means you don’t have to worry just yet: the new tax filing requirement will impact your 2022 tax return filed in 2023.
Here’s how the new tax return will work.
Your new 1099-K tax reporting requirements
As of January 1, 2022, you will receive Form 1099-K from third-party network providers for income received through electronic payment methods by January 31 of the following year.
In the near future, companies like PayPal, Zelle, or Cash App may ask you for additional information to correctly report your transactions on your Form 1099-K. You may be asked to provide your Employer Identification Number (EIN), Individual Tax Identification Number (ITIN), or Social Security Number (SSN) if this information is not on file.
Your Form 1099-K will include credit card payments and online payments. You are required to report any income shown on your Form 1099-K from your taxable transactions on your tax return.
Will Venmo, Cash App and Zelle users have to pay a new tax?
To Venmo, Cash App, and other users, this may look like a new tax, but it is simply a change in tax reporting from existing tax law.
Form 1099-K is a tax form sent to users that can include taxable and non-taxable sources of income. A source of taxable income is included in your income, such as salaries, rents, tips, and retirement income. While a non-taxable source is excluded from your income and you will not need to report it on your tax return.
Here are some examples of tax-free income:
- Money received from a friend as a refund
- Money received from a roommate to pay their share of the rent
- Money received from a loved one as a gift
Also, if you receive money by selling a personal item at a loss, you are not required to report the amount on your tax return. For example, if you bought a dress for $ 100 and sold it for $ 50, the amount is not taxable.
But although the new law does not create a new tax, you must keep good records of any taxable income received.
How to keep good records for tax returns
Since your Form 1099-K can include both taxable and non-taxable income, it is essential to keep good records. You want to select a record keeping system that clearly reflects your income.
You should keep records such as bank statements, receipts, invoices, and other financial documents to reflect taxable income. You may consider backing up your records electronically or manually.
If you are a business owner, it is a good idea to set up a third-party network platform, such as Cash App, Zelle, or Venmo, separately for your business and personal transactions. In this way, you can easily track business transactions.
Also, keeping good records can be helpful in proving taxable and non-taxable sources of income if the IRS checks your tax return.