There's an App for That

New $600 reporting requirement for businesses using PayPal or other payment apps

BY KIMBERLY ZARETT AND JACKIE ZHANG

IF YOU’RE A SMALL BUSINESS OWNER and use payment apps like PayPal, Venmo, Zelle, or Cash App to receive payments for goods or services, it is more likely that your sales information will be reported to the IRS by these third-party settlement organizations (TPSOs) beginning with the 2022 tax year.

Previously, TPSOs only reported to the IRS if you received more than $20,000 in gross revenue and at least 200 transactions. The American Rescue Plan Act of 2021, commonly known as the COVID-19 stimulus bill of 2021, made a change to the income reporting process. Now, the IRS requires TPSOs to report if they process $600 or more in gross payments during the year, regardless of the number of transactions.

Form 1099-K, Payment Card and Third-Party Network Transactions, are used to report certain payment transactions to improve voluntary tax compliance. According to the IRS, you should receive Form 1099- K by January 31st if, in the prior calendar year, you received reportable payments. Payment card transactions such as gift card, credit card, debit card, or third-party network transactions such as payments received through PayPal, Venmo or other payments apps would be counted as reportable payments if they are for goods or services.

This new reporting requirement only applies to transactions for the provision of goods or services. Transactions that are personal in nature, such as gifts or reimbursements, are excluded from Form 1099-K reporting. For example, friends sending money to reimburse each other for splitting a dinner should not be included. As a result, it is important for you as a business owner to make sure your profile in the payment app is updated. Payment app providers rely on the users to help classify the reportable versus non-reportable transactions. For example, Venmo has an updated FAQ that states “customers may receive an in-app notification or email … asking to confirm the information they use when filing their taxes. … By providing this information, customers will be able to continue using their Venmo account to seamlessly accept payments for goods and services without any issue in 2022 and beyond.”

Besides updating your profile, you should also make sure that you keep good records. When you receive Form 1099-K in 2023 for the 2022 tax year, it will show the gross amount of all reportable payment transactions. The IRS defines the “gross amount” of reportable transactions as the total unadjusted dollar amount of aggregate payment transactions. In other words, the gross amount does not include any adjustments for credits, cash equivalents, discounts, fees, refunds, or cash back at purchases. Hence, the amount on the 1099-K may not represent your actual taxable amount. It is also possible the personal transactions could be included if you receive payment through your business account. As a best practice, you should have separate accounts for personal and business transactions.

While you have always been responsible for reporting and paying taxes on your income, this new law simply gives the IRS more comprehensive information to make sure you are accurately reporting taxable revenue. You can still offset the income reported on 1099-K with your deductible expenses, so be sure to have a proper recordkeeping system that clearly reflects your revenue and expenses.

Kimberly Zarett is a principal and Jackie Zhang is a senior accountant at Cover & Rossiter.