Life doesn’t always give you lemons – sometimes it gives you a Lego to step on or a chocolate chip cookie brimming with raisins. And for many people in 2023, life will bring a Form 1099-K to ensure certain transactions on apps like PayPal, Venmo, and Cash App are taxed appropriately.
This is due to the new tax reporting requirement imposed on Third Party Settlement Organizations (TPSOs), such as PayPal and cash app, as part of the American Rescue Plan Act which was signed into law in 2021. The law amended certain sections of the Internal Revenue Code, requiring TPSOs to report goods and services transactions made by users with $600 or more gross annual sales, regardless of the total number of transactions, on Forms 1099-K. Previously, this form was only issued to users who received more than $20,000 and 200 transactions from the sale of goods and services in a year.
The change went into effect on January 1, effectively lowering the threshold at which TPSOs must report payments for goods and services to their users.
Other companies that routinely distribute 1099-K forms to users who meet the IRS income threshold, such as Airbnb and Etsy, are also subject to the new rule. Some companies, like DoorDash, already require users of their platform to declare their income if it exceeds $600.
Most casual TPSO users won’t be affected, even if they use these apps to reimburse a roommate for rent, split the cost of dinner, or send gifts to loved ones.
What determines who will get a 1099-K? Who is eligible?
To determine if you will receive a 1099-K, the key words are “goods and services”. Many TPSOs – such as PayPal and Venmo – and others – like Cash App – have separate accounts that allow users to identify which of their transactions are for goods and services. In these applications, only transactions labeled as such will be considered for Form 1099-K.
Those who receive more than $600 in goods or services transactions, such as payment for a birthday cake or a haircut, through a third-party settlement organization, will receive a 1099-K the next year.
People receiving payment for a good or service through a TPSO should have reported that income on their taxes from the start. So the form may not have a huge impact on them, other than identifying some receipts that may have been inadvertently omitted before, according to Jim Brandenburg, tax partner at accounting and professional services firm Sikich LLP.
It could make a significant difference for small business owners like Jeff Klemm, a local musician and music teacher who regularly uses PayPal and Venmo for business and personal transactions. Klemm embarks on a week-long project each spring to determine which third-party settlement agency transactions from the previous year should be reported to the IRS. It is curious to see if receiving a 1099-K from the TPSOs he uses will significantly shorten his filing process in 2023.
For Klemm and other businesses, keeping up to date with new tax laws and how they affect them can be exhausting.
“The whole point of these things, which I understood, is basically to eliminate cash and trips to the bank,” Klemm said. “For example, Venmo, I use it to take payments. I also use it to pay bills. I use it to send money to friends for food. It serves as another extension of my bank account. It used to be kind of all encompassing, but now with these new laws it seems to be more and more regulated.
Misinformation surrounding the new tax reporting requirement has also had a negative impact on local buyers and sellers. Klemm recently tried to buy a musical instrument from someone online, but the seller wouldn’t accept payment through any type of TPSO – citing new rules such apps are subject to.
“Usually these transactions are cash anyway, but sometimes they’re done (via) Venmo,” Klemm said. “I asked him, ‘Do you take Venmo? and he replied, “No, these new tax requirements have stopped me from selling things online.” So I know it affects the resale market a lot.
What sellers may not know is that items sold at a loss cannot be taxed, regardless of how they appear on someone’s 1099-K. The same goes for reimbursements and personal gifts, which are generally not reportable on your tax return.
Another notable exception concerns exchanges carried out by Zelle, a well-known digital payment network that is not required to report its users’ transactions to the IRS.
“Payments between friends and family, and qualifying small businesses sent through the Zelle network are not subject to this law because Zelle facilitates messaging between financial institutions but does not hold accounts or handle the settlement of funds,” Early Warning Services, LLC., Zelle’s network provider, said in a statement. “If payments received on the Zelle network are taxable, the onus is on the consumer or organization to report them to the IRS.”
Keep good records to avoid problems at tax time
So how will users who receive a 1099-K prove that certain transactions are not deductible or reportable?
Good record keeping seems to be the answer.
“Although you do not need to report these types of transactions on your tax return, if you received a Form 1099-K for the year, keep a record in your tax records or discuss this with your tax advisor. to find out why the amount on the Form 1099-K didn’t need to be reported on your tax return … in case you were asked about it,” Brandenburg said in an email.
PayPal and Venmo have a toggle that allows its users to identify which transactions are for goods and services, but all other similar apps do not.
What happens to TPSO users who don’t give them the ability to identify transactions as a good or service?
Again, record keeping remains king.
“The IRS probably won’t know if (a transaction) is a refund, a gift, or a donation,” Brandenburg said. “The recipient should know this and can report all required items on their tax return, but should keep track of all items that do not need to be reported on their return in case they are asked questions at this subject.”
To ensure a smooth 2023 tax season, users who know they will exceed the $600 threshold should keep tabs on their transactions for goods and services in third-party settlement organization apps.
“[Those users] should track their receipts and use the receipts to reconcile their own records with what is included on their Form 1099-K,” Brandenburg said. “Individuals who exceed the $600 threshold will need to report their actual receipts for the year on their tax return, and this could potentially differ from what is shown on Form 1099-K.”
If you’re still concerned about the new reporting requirement and how it will affect your 2023 tax filing, the Brandenburg and TPSO representatives suggest consulting a tax professional.
Contact Beacon Journal reporter Tawney Beans at [email protected] and on Twitter @TawneyBeans.