Payment Apps like Venmo and Paypal Now Subject to Tax Reporting

Third-party peer-to-peer cash apps like Venmo, Paypal, Zelle, and Cash App have become popular and have become essential to everyday life. Under a little-publicized provision in the 2021 American Rescue Plan Act (ARPA), third-party peer-to-peer cash apps must begin reporting to the IRS business transactions totaling $600 or more.  The new law aims to clamp down on business people, particularly those operating in the gig economy like Uber and Lyft drivers and Airbnb landlords, who have not been reporting all of their taxable business income. This could create some unexpected problems for entrepreneurs who use one or more of these apps to conduct business.

Starting January 1, 2022, the new tax provision went into effect that now requires payment services to issue Taxpayers a 1099-K tax form each year he or she receives $600 or more annually. Small business owners, independent contractors, or anyone who has a business that accepts payments through such cash apps must report such payments as income on a 1099-K form.

The old “de minimis” law also known as the minimal amounts exception for reporting by third-party network transactions was payments exceeding $20,000 and 200 transactions for the year.  The new law has dramatically reduced the threshold from $20,000 to $600 in 2022, with no minimum number of transactions. 

The new law does not affect casual and personal transactions made through one of the third-party networks. For example, if you are being reimbursed by friends for the tab at a restaurant or for tickets to a sporting event or concert. Nevertheless, the new reporting requirement could lead to some tax complications. The third-party network may not be sure if a transaction is personal or for business. If it issues a 1099 to you for a charge in a gray area, it is up to the recipient to prove that this is not a taxable event if the IRS includes the payment as taxable income. One possible solution is to recommend consistently using separate accounts for business and personal transactions. That will provide more credibility if the IRS later examines the taxpayer’s transactions.

Also, it is possible to receive some duplicate Forms 1099 for the same goods or services.  For example, if you get a 1099-Misc from the customer or client and a 1099-K from the third-party provider.  The burden is on the recipient to establish the existence of just one business transaction for the transaction. 

The bottom line is that third-party peer-to-peer cash app users will now have to be very careful with their records and can no longer hide. Expect new audits in this area.

Patel Law Offices offers a free strategy session to discuss how to resolve your legal problem. Conveniently schedule online today...

For foreign asset problems complete our questionnaire and online scheduler.

For other tax problems complete our questionnaire and online scheduler.

For estate planning complete our questionnaire and online scheduler.

For probate/estate administration complete our questionnaire and online scheduler.

For other legal problems visit our website and online scheduler.