If you use P2P (Peer-to-Peer) payment apps, such as Venmo, Square Cash or PayPal, you may be surprised early next year when you find an IRS 1099-K form in your mailbox.
Under the American Rescue Plan, a new law requires P2P providers to send you and the IRS a 1099-K if the gross amount of your business income is more than $600.
Previous guidelines required P2P providers to only send 1099-Ks when you had 200 transactions and $20,000 or more in income.
This new law decreases the income threshold by more than $19,000 and lowers the transaction threshold from 200 to one transaction! So whether you’re accepting payments for personal or business income, many more taxpayers will be receiving the 1099-K in early 2023.
How it works
If you sell items online for extra cash and earn more than $600, you’ll be getting a 1099-K. If you occasionally rent a property that you own and charge more than $600, a 1099-K will be sent to you. Or if a client asks to remit payment through PayPal, $600 or more will trigger a 1099-K.
Each year, hundreds of billions of dollars flow through third party apps like Venmo, CashApp and SnapCash. This new, tougher tax law is designed to make it harder for individuals to fail to report income on lower-cost transactions.
Suggestions for good record-keeping
Here are some ideas to keep a close eye on the tax implications of your P2P transactions:
- Confirm the numbers. Mistakes happen, so check 1099-Ks against your payment receipt records.
- Report the information correctly on your tax return. Include the numbers from each 1099-K you receive and ensure you report all income from all types of payments received.
- Maintain detailed records. This can help demonstrate support for your income and deductions.
Also keep in mind the 1099-K does not account for fees, chargebacks or other costs and refunded amounts. The gross amount is unadjusted and, according to the IRS, is not to be adjusted.
What if the amount on your 1099-K is wrong?
Contact your P2P provider to request a corrected form. The name of the P2P and a phone number will be located in the upper left corner on the form.
If you are unable to get a corrected 1099-K, the IRS will allow an explanation to be attached to your tax return, along with the corrected amount of your income on the return.
Remember, if you use Venmo and several other P2P providers to accept payments, you could receive 1099-Ks from all of them, depending on which ones meet the $600 threshold.
Reach out to the experts
For more information on protecting your side hustle or small business from unexpected tax liabilities, give us a call at (973) 301-2300 to see if a tax planning session may be right for you.