While the 2021 tax season has not quite wrapped up yet, there are new IRS rules beginning in tax year 2022 that apply to reporting requirements for certain transactions.
IRS Form 1099-K, Payment Card and Third Party Network Transactions, has been around for about a decade, and was previously required for payments totaling $20,000 or more when there were 200 or more transactions settled through a third-party network. The new rules, signed into law in March 2021 through the American Rescue Plan, changed the threshold reporting amounts. As of January 1, 2022, third-party apps and networks must now report business transactions totaling $600 or more regardless of the number of transactions, which is a significant difference from the previous threshold.
It is important to note that just because you may use one of these third-party payment apps, such as Paypal, Venmo, Cash App, etc., this law does not automatically apply to you. This law applies only to payments made in settlement of reportable payment transactions (e.g. payments for goods and services, including tips) and will generally not apply to payments from friends and family (e.g. being reimbursed by a friend for dinner; receiving money to pay for a group gift; etc.).
Some third-party payment apps have started including a toggle at the bottom of their screen that allows the payee to indicate whether the funds are being sent for a purchase of goods or services, which will allow for more accurate Form 1099-K reporting to the taxpayer.
Here are some items to consider regarding record keeping:
• Since the Form 1099-K may include income that is both taxable and nontaxable, you will need adequate records to know what income is reportable;
• If you use these apps for business and personal exchanges, we recommend maintaining separate accounts to ensure these payment records remain separate and more convenient to report; and
• Payments across multiple platforms will be aggregated to trigger the $600 threshold; and
Ultimately, most third-party payment apps will be required to send Form 1099-K to app users and the IRS requires taxpayers to report payment transactions (for goods and services) totaling $600 or more in the calendar year. If you have questions or would like to speak with someone regarding recommendations and best practices for your business invoices and payments through these third-party apps, give us a call.
Stacy Lubbers gives an overview of the new rules for Third-Party Payment Apps
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