Do you accept payments for goods and services via Venmo, PayPal, or other “cash apps?” Are you doing business on Airbnb, Etsy, or eBay? If the answer is “yes,” your income tax filing will be subject to another layer of complexity this year.
According to a new provision in the tax code, which took effect this January, third-party payment platforms are now required to issue member users and the IRS a 1099-K form for “business transactions” totaling over $600.
To clarify the definition of a “business transaction,” the IRS is looking for payments on goods and services, including tips, that reach the $600 threshold.
In the past, these portals and platforms were only required to issue a 1099-K to businesses that completed over 200 “business transactions,” totaling more than $20,000 in revenue annually.
This new and significantly lower bar is destined to rope in far more taxpayers, including many operating in the freelance and “gig economy” sectors. If you fall into this category, here’s what you need to know:
Expect New Paperwork
Business operators who’ve never received a 1099-K form before can expect one in the coming year. Considering $600 is a nominal figure, this new regulation will likely impact many businesses, including solo operators, solopreneurs, and sole proprietors using online payment portals or doing business on platforms like Etsy and eBay.
No “New” Taxes Are Due
It’s important to keep in mind this requirement does not actually levy any new taxes. Business owners have always been responsible for reporting any income received for goods or services.
The new regulation is aimed at business operators who have sought to reduce their taxable income by under-reporting payments received through online payment portals.
Payment Received Through Zelle Are Exempt
As I noted in a recent Tax Times update, payments received through Zelle are not subject to these new regulations.
The reason being Zelle is owned and operated by a group of major banks for the express purpose of facilitating “bank-to-bank transactions” but not the “settlement” of funds, which the transaction participants are considered responsible for.
All of this said, Zelle transactions are still reported in some cases. Registered corporations making business-to-business payments over Zelle must report such transactions to the IRS and issue the receiving business either a 1099-NEC for non-employee compensation or a 1099-MISC form.
Not Applicable to Reimbursements or Online Resale of Used Belongs
The rule doesn’t apply to personal transactions between two individuals. If, for example, you’re repaying a friend or family member for concert or sport event tickets or splitting the cost of holiday gifts or a group dinner out, no taxes are due.
As I also covered in a recent Tax Times update, the new rule doesn’t apply to the online resale of old personal items. Let’s say you’re selling an old bike, used laptop or phone, or another potentially high-priced item from your latest garage or attic clean-out on eBay or Craigslist — You don’t owe any taxes on these transactions.
Though it’s worth noting, you may receive a tax form from these platforms. But you can just ignore it because the underlying regulation is not applicable.
How Will New Regulations Governing Online Payments Impact Your Taxes?
If you’re operating a business, no matter how small, and you’ve received payments of $600 or more via Venmo, PayPal, or other similar “cash apps” over the course of the past year, expect a 1099-K.
If you’re not sure how to deal with this paperwork or have more questions about how this additional revenue will impact your income taxes, get in touch for a FREE consultation!