As a result of the American Rescue Plan Act of 2021, people who use third party platforms such as Venmo, Cash App, or PayPal to collect payments for a business or hobby, must report payments of $600 or more to the Internal Revenue Service.
Overview
This new rule is targeting individuals who are collecting payments on these third party apps for things such as a side hustle, part-time business, or small business. The rule does not apply to people who use these apps to do things such as send money to friends, pay for a vacation or making and collecting one time payments.
New in 2022
Prior to the year 2022, the rules for third party transactions for people that applied were based on different thresholds. According to the IRS, individuals had to report gross payments over $20,000 and report any earnings if they made over 200 transactions throughout the year.
After the American Rescue Plan Act was passed, any transactions made after March 11th, 2021 that is $600 or more must be reported to the IRS. The amount of transactions made throughout the year does not apply anymore. Since these earnings have already been taxable this is not a change in the law but rather a change in the reporting of the income.
Reporting Third-Party Earnings & Transactions
The way these third party transactions and earnings are reported is by filing Form 1099-K. The forms should be sent to the individual by each third-party payment app that transactions are received through. There has been reports of people receiving the form for personal transactions instead of business transactions from the third party platforms. If this happens to you, the IRS recommends to contact the payment platform and ask for the correct form. They also suggest attaching a brief explanation on your tax return.
Filing Form 1099-K
If you are someone who is expecting to file a 1099-K this tax season, keeping an up to date record of transactions, balance sheets, and any other financial statement that may be important for tax purposes. Not staying up to date will lead to inaccurate tax returns which will likely trigger an IRS audit.
Wrap-Up
While staying organized during filing time always helps, something else that is direly important is a tax professional. Having a trusted accountant or advisors in these situations will prevent you from getting sneak attacked by an audit, because these professionals will be able to make sense of your tax liability, and make it work for you.