And while the new $600 trigger for Venmo, PayPal, and other such electronic transfer options does apply to this year's transactions, you won't get the associated 1099-K forms until next (2023) filing season.
You and your pals regularly meet for lunch or happy hour and split the costs. You also send your baby sister some cash when she runs low.
And, of course, you do all this via a peer-to-peer (P2P) payment app that lets you transfer money quickly to your friends and family members' mobile devices.
Now you're freaking out because you heard the Internal Revenue Service is going to be tax those transactions.
Take a breath. That's not happening.
New law, different reporting rule: What is happening is that if you're a seller of goods or services online and are paid through third-party transaction networks like PayPal, Cash App or Venmo, you — and the IRS — could get a tax statement detailing the amount.
A provision in the American Rescue Plan Act (ARPA) mandates that the payors issue you a Form 1099-K if your online sales reach $600. All transactions, regardless of how small, will be counted toward this $600 trigger.
Take another breath. That tax reporting rule doesn't take effect until the 2023 filing season, meaning you won't get a 1099-K this year, but will in connection with your online earnings in 2022. In fact, the change means a lot more people likely will receive the forms next year.
The ARPA change was to address online earnings on sited such as Etsy and eBay that have been slipping through the tax collection nets. Current law calls for 1099-Ks to be issued only where online sellers had at least 200 transactions worth a combined $20,000 or more.
The $600 amount aligns online sales with the earnings level that triggers other third-party reporting, like 1099-NEC forms, for the self-employed. And like those other tax forms, the 1099-Ks will be issued regardless of whether your online income was from a part-time side hustle or your full-time job.
Self-employment tax: Less income triggers filing
All this talk about dollar amount tax triggers leads to a quick self-employment tax digression.
You could make less than the $600 earnings that trigger a form and still owe self-employment tax. This is the entrepreneur's version of the Social Security and Medicare taxes that are withheld from working-for-the-man-or-woman paychecks.
The Internal Revenue Code requires you pay self-employment tax, by filing Schedule SE, when such earnings hit $400. Ignore this filing and payment and not only are you breaking tax law, you're shorting yourself when it comes to future retirement benefit payouts.
You can find more on that in my post, Paying self-employment taxes on the revised Schedule SE.
Taking on the Tax Gap: And no, you're not being picked on because you use the internet. Even if you never got an any type of official tax statement, any amount of earned income is taxable.
These third-party statements just help the IRS ensure that you're fulfilling your tax obligations. Congress decided to expand their issuance because of the persistent Tax Gap. That's the amount of tax owed but not collected.
The Tax Gap's continued growth has forced the IRS and federal lawmakers to focus on ways to reduce it. The required reporting of more income via expanded 1099-K issuance is an easy way for the IRS to start filling some of that gaping unpaid tax hole.
Social media tax reporting false alarm: The law change has, however, caused a bit of panic among folks who use cash transfer apps for personal financial transactions. It seems that online chat rooms and social media reports didn't quite get the upcoming $600 reporting rule change right.
First, it didn't go into effect until this Jan. 1. That means last year's earnings aren't subject to the rule. You won't get a 1099-K this year unless you met the 200/$20,000 thresholds.
Also, despite frantic warnings across the internet and noted earlier in this post, personal transactions will not be counted in the amount that's taxable.
The law change notes, in fact, that certain amounts that may be included on the form that are generally excluded from gross income and therefore are not subject to income tax. Applicable excluded transactions include:
- Amounts from selling personal items at a loss,
- Amounts sent as reimbursement, and
- Amounts sent as a gift.
So that money for your kid sister is not taxable. Neither is the $15 you sent your BFF for last night's outing that she covered with her credit card.
And don't worry about taxes on the online sale of personal items that don't produce a profit. For example, that cute purse you bought for $200 is just too small to hold all you need to carry, so you used an app to get $100 for it. As with garage sale transactions, similar electronic transactions that produce a loss are not taxable.
Notices, but not tax info, already going out: In preparation for the new reporting requirement, the various platforms that will be that will be sending out 1099-K forms next year have been sending clients notices about the change.
PayPal, which owns Venmo, also has a FAQ page for users.
And some apps also let users tag transactions as either personal/friends and family or goods and services. If your cash transfer app offers that option, it's a good idea to use it. It will help your record keeping and tax reporting.
Regular record keeping rules apply: In fact, if you are operating a business, either online or in real life or both, setting up a good business record keeping system is key. You need to track your transactions, both incoming and outgoing and regardless of the method used, for both your business' success and tax reasons.
And it needs to be a separate from your personal accounts. When you intermingled business and personal money, the IRS tends to take notice. Such mixed money also makes it harder for you to separate the transactions so you can accurately answer any tax auditor's questions about your legitimate business transactions.
Your records also will, obviously, keep track of your business profits. How much you bring in determines whether your company survives, as well as how much you owe the U.S. Treasury.
But you also need to record expenses that could be tax deductible. Missing out on these mean that you might overpay your tax bill. No one likes to do that, at either the personal or business level.
If your operation involves cash app transactions, with the new $600 1099-K rule now in effect for the 2022 tax year, you need to carefully track those payments, too. Starting yesterday.
Other tax statements arriving this year: Third-party tax statements are a part of your records. Keep an eye out for those that will tell you, and the IRS, how much you made in 2021. The issuance deadline is Jan. 31, so if you haven't already received them, you should by next week.
You might not see a 1099-K in this year's batch of tax documents, but you likely will in 2023 if your online earnings reach and/or exceed $600 this year. While it's no fun paying taxes, at least when you make enough money to interest the IRS, it means you're a success.
Finally, on an ol' blog specific note, the $600 upcoming reporting amount and current self-employment trigger earns not only additional form issuance next year, but also this weekend's By the Numbers honor.
You also might find these items of interest:
- 4 tax matters that matter for the self-employed
- 5 tax tips for freelancers, gig economy workers
- A Labor Day salute to COVID-created new entrepreneurs
- Tax return checklist & questions to help you file your taxes