As result of the American Rescue Plan Act of 2021, third-party platforms that create holding accounts and / or settle funds between two parties will be under more scrutiny than ever before. This will include well known app’s such as, CashApp, PayPal, Venmo, Etsy, etc. Take note that Zelle is NOT a third-party network because they only facilitate messaging between financial institutions. And therefore, a 1099-K should not be distributed.
The new 2022 tax law indicates that any transaction(s) which accumulate up to $600 or more will receive a 1099-K that will need reported to the IRS as Income. This is primarily designed to capture income from small businesses. The IRS specifically states the following, “The American Rescue Plan Act of 2021 clarifies Form 1099-K reporting by third-party settlement organizations applies ONLY for transactions for the provision of goods or services settled through a third-party payment network.”.
This is nothing new, it is just a change. The previous tax law required distribution of the 1099-K for the caveat is it was for any transactions of 200 or more, and/or fund transfers that accumulated over $20,000 be reported to the IRS.
As a result of this change, there has been confusion regarding who is affected by the new tax law. Basically, if you are selling a product or service and receiving funds via these third-party app, you are being examined more closely. Or another example includes an individual “season ticket holder”. Often individuals will not be able to make a game, they may sell their seats to another fan. If the sales value of the transaction, or multiple transactions encroaches $600, expect to receive a form 1099-k. To be clear, individuals and businesses have always been obligated to report their income to the IRS — but this new law is targeting a greater deal of businesses by lowering the threshold. As a result, this may open many more audits by the IRS if they don’t correctly report their earnings.
It is imperative to keep copious notes and backup supporting the cost of any item sold. Properly tracking your finances outside of the third-party payment platforms will be crucially important. Often, small businesses do not have proper books. More extensive bookkeeping efforts will help keep things in order. Make sure to begin gathering your paperwork now in order to help with the transition and make tax season 2022 as stress-free as possible.
Keep your personal life separate from your business
It often feels innocent to pay for dinner on your own and have family and friends reimburse you. When receiving the funds from your family, it will begin to trigger the countdown until you will hit the $600 threshold. In turn this can prove to be a hassle when tax season arrives. The IRS has a strong stance that requires the taxpayer to prove if something is other than business. The burden of proof lies with the taxpayer – YOU. Labelling transactions as business or personal is helpful, but it’s well worth the added expense of opening business-specific accounts to avoid potential headache down the line.
TAKEAWAYS
- Keep good records of the cost of your goods when using a third-party platform for your business.
- The burden of proof is on you the taxpayer to prove a receipt is not income.
- Keep good bookkeeping records to support your tax stance.
- Do not commingle personal and business activity. Open a separate third-party app
