On New Year’s Day, a new rule goes into effect impacting people who use PayPal, Venmo, or other digital payment apps for transactions.
In order to further cut down on income that goes unreported by American taxpayers, a new provision under the American Rescue Plan Act (ARPA) calls for payment platforms to report transactions over $600 to the Internal Revenue Service (IRS). If this means you, you will receive a 1099 form from the platform totaling up your transactions over $600.
There are a lot of questions about the new rule, and not a lot of clarity yet. PayPal, which owns Venmo, is expected to roll out more information in the coming weeks.
The requirement to report money earned from side-hustles and online selling is not new. Anyone with net earnings from self-employment of $400 or more is required to report that income to the IRS. We have all heard of individuals who make a good living buying and reselling online goods. The IRS has heard of these folks too, and wants to ensure entrepreneurs are paying appropriate tax on income. One way to step up enforcement is to require payment apps to report these transactions.
There is no doubt that the IRS is putting the pinch on online sales. While sellers will grumble, there is little doubt that the robust online economy is rife with tax fraud, unreported or underreported income and false income tax returns. The new rule to issue 1099s for those with transactions over $600 replaces the current threshold of a 1099 required for those who conduct at least 200 transactions that total at least $20,000.
For merchants with online storefronts on Etsy, eBay, or Amazon, the increased scrutiny will likely not be welcome. Many of these sellers are not making loads of money to begin with and toeing the line for the taxman is likely to take a chunk out of their earnings. As noted, the income was always reportable and the new rule make the requirement more visible—and easier to enforce.
Just as with W-2 forms, the IRS can easily match 1099 forms from payment platforms with income reported by an individual on their tax return. If the numbers do not sync, an IRS civil audit could be in the offing.
Those who routinely use digital apps to reimburse friends, pay for non-business items or pick-up the dinner tab need not worry. Difficulties could arise, however, if the payment platform cannot distinguish between business and leisure transactions. In that case, a 1099 could be erroneously issued and it will be your responsibility to prove it is on the up and up.
Just how smoothly the new rule goes into effect remains to be seen. If concerned about how you transact business and what you should be reporting, speak with an experienced tax attorney.
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