Venmo and Similar Applications to Report Payments of $600 or More to the I.R.S.

Do you use 3rd party payment applications to get paid for your freelance work? Read on to see how this new law might affect you.

Venmo and Cash app have become popular payment apps for quickly transferring money from one person to another. With virtually no wait time to receive your money and no transaction fees to pay, these third-party payment apps are the ideal choice for many freelancers and small business owners when receiving customer payments.

However, as of January 1, 2022, third-party payment apps will report payments of $ 600 or more to the IRS. This differs from past practice that only required third-party requests for cash to report payments to the IRS if:

1)Gross payments exceeded $ 20,000

AND

2)More than 200 transactions in the same year

Whoa ... So why is this happening and how could it affect me?

In March 2021, the United States Rescue Plan became law. This law is primarily focused on ensuring that small business owners who receive payments through third-party payment applications pay taxes on the money they receive for products and services. For your next tax year (2023, as it will take effect in 2022), you will receive a 1099-K tax form to report total income received through third-party payment applications of $600 or more. However, not all income payments are included in taxable income. The following will not be considered taxable income:

• Money received from friends as a reimbursement

• Money received from a roommate for their portion of the rent

• Money received as a gift

The importance of keeping good records

When you receive your 1099-K form, you can expect that there will be no separation of taxable and non-taxable income. Here are 2 options: 1) Separate your professional third party payment accounts from any personal transactions, or 2) Keep excellent records of your business transactions. Option 2 is to safeguard receipts, invoices, bank statements, and other important financial documents. Good bookkeeping is critical to ensuring that after you file your taxes, you will be in a good position if the I.R.S decides to audit you.

Conclusion

• The American Rescue Plan begins 1/1/2022.

• You will receive a 1099-K in early 2023 if you received income of $ 600 or more through third-party payment applications. (Venmo, Cash App, Zelle, etc.)

• If you choose not to separate your personal transactions from your business transactions by creating separate accounts, it is best to keep excellent records.