IRS flexes its muscle, to gig your side hustle.

Payment application

Third-party payment applications, like Venmo, Paypal, and CashApp, have become an integral part of American lives. And in a society that is rapidly becoming cashless, these applications are used extensively by individuals, small businesses, and the so-called “Gig-economy.”

However, a new IRS rule poses to create headaches for all third-party payment application users. The new rule will require payment apps like Venmo to report – and issue a Form 1099K for – all transactions over $600 to the IRS. Previously, under the old rule, payment apps were required to report only those transactions over $20,000 with over 200 transactions. This meant a huge number of users who earned income through payment apps likely could avoid reporting it to the IRS with impunity. The new rule will close this loophole and make it more difficult to hide unreported income. Throughout this process, the IRS has been clear that the rules for reporting income have not changed and that persons receiving taxable income paid through third-party networks have always been required to track and report their taxable income.

This rule has been controversial and the confusion about the rule resulted in the IRS delaying implementation until 2024. Thus, the $20,000 and 200 transactions threshold will remain in place through December 31, 2023.

Even still, there is concern about the burden that this rule will put on small businesses. These businesses often use payment apps to make and receive payments, and the new rule could add a significant amount of recordkeeping. In this transition period, the IRS has said that it is working with small businesses to help them comply with the new rule. The agency has also said that it will not penalize businesses that make a good-faith effort to comply.

The IRS has also said that the rule will not have a significant impact on most individuals, as the vast majority of payments made through payment apps are for personal reasons. But it is not yet clear how the IRS proposes that third-party payment applications ensure that transactions like receiving reimbursement from a dinner bill will not be attributed as taxable income. But for individuals who have been using personal accounts to operate small businesses “under the radar,” it is time to get their businesses sorted or face significant penalties later.

Here are some things to keep in mind if you use payment apps like Venmo:

  • Make sure that you are reporting all of your income to the IRS. If you are earning income through payment apps, you should be reporting it on your tax return.
  • If you are a small business, be aware of the new reporting requirements. The IRS has said that it will not penalize businesses that make a good-faith effort to comply.
  • If you have been using a single payment app account to receive both taxable and non-taxable income and you think it might be difficult to keep a sufficient paper trail to show that non-taxable payments to you were in fact non-taxable, you should consider having separate payment app accounts: one for your taxable income, and a separate one for non-taxable (personal) payments.
  • If you have any questions about the new rule, visit the IRS website, as the agency has resources to help taxpayers understand the new rule and comply with it.

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