If you have consulted a tax attorney in San Jose about the new tax reporting regulation, you have probably discovered that its implementation is right around the corner. This new regulation goes into effect as of January 1st, 2022, and it will affect millions of people who use third-party electronic payment networks, such as Venmo, Square, and PayPal.
Before this change in tax reporting regulations, app providers were only required to send the Internal Revenue Service a 1099-K form if an individual made 200 or more business transactions in a calendar year that resulted in $20,000 or more in gross payments. Tax-planning professionals agree that increased visibility of income transactions to the IRS is considered the biggest change concerning the new rule. The IRS will now have a clearer picture of who is, and who isn’t, reporting income. The reporting rule’s expansion is part of the American Rescue Plan Act of 2021, which became law earlier this year.
What Has Remained the Same
It’s important to understand that the new threshold for reporting doesn’t change a person’s basic responsibilities with regard to paying taxes. Any income received for the sale of services or goods, including tips, is usually taxable and is still reportable, as always. In other words, regardless of whether or not a third-party payment provider reports the data to the IRS, individuals have always been responsible for listing such income on their tax returns. If not, they risk facing tax penalties and other consequences if the concealed income is discovered.
The new regulation also does not change what constitutes nontaxable money. For example, if a relative or friend sends money to a person through Venmo or PayPal as a gift or to reimburse the individual for something, it does not suddenly become taxable.
Who Should Be Concerned
Theoretically, only those who weren’t reporting their full business income should be worried about this new rule. However, some third-party payment providers may not realize whether a transaction was for goods or services or if it falls under the umbrella of nontaxable income. Therefore, it is the taxpayer’s responsibility to inform the IRS if a 1099 was received for a nontaxable transaction. There is also a good chance that some transactions may be reported in duplicate for independent contractors or freelancers. For example, the payment app may send a 1099-K to the IRS, but when the client does so for the same transaction, the taxpayer must clarify this with the IRS or risk being billed double for the taxes.
Most Important Information for Now
Each app provider is responsible for deciding how they will implement the rule and alert customers about anything they need to do to clearly identify what type of transactions they are completing. Some apps have already reached out to customers to request information such as a Social Security Number, Individual Tax ID Number, or Employer Identification Number.
Ultimately, the new requirements may motivate some individuals to ask customers to pay in cash, especially for minuscule amounts such as tips. They may also shun third-party payment processors entirely if the transaction is nontaxable. Tax lawyers are the best individuals to answer questions about whether or not a person may be facing tax penalties and how the use of payment apps for all transactions may impact their financial situation.