UPDATE: IRS Delays Reporting Requirement for Transactions Involving Venmo and other Payment Apps by Savannah Snow, CPA
Mobile payment processing apps, such as PayPal, Venmo, Cash App and Square, have made it easy for friends and family to send and receive payments as gifts or reimbursements for shared expenses. These platforms have also spread to the commercial sector, where many businesses accept them as forms of payment for goods and services. It is these businesses, however, that must take heed and prepare for new tax-reporting requirements beginning in 2023, rather than the IRS’s initially planned 2022 tax-year enforcement deadline.
Effective Jan. 1, 2023, peer-to-peer mobile payment and third-party settlement-service organizations (TSPOs) are required to report to the IRS the commercial payments their users receive in exchange for goods and services that exceed $600 each year. For the 2022 tax year, which the IRS will now treat as a transition period, the threshold for reporting gross payments and issuing Form 1099-K to taxpayers remains at $20,000 and more than 200 transactions per year. However, with the elimination of the transaction-volume requirement and the severe reduction in dollar limitation beginning in 2023, many more businesses and self-employed individuals can expect to receive Form 1099-K by the first quarter of 2024, just in time for the 2023 tax-filing season.
This new law, established under the American Rescue Plan, changes the tax-reporting requirements for payment processors and applies only to payments users receive for goods and services in the ordinary course of business. It does not levy any new tax, nor does it apply to individuals who use mobile payment apps for personal convenience. Instead, affected users include established businesses, independent contractors, gig economy workers and others who earn taxable income from side gigs. In an effort to encourage more taxpayers to report their self-employment income, the IRS also applies the new reporting requirement to transactions involving taxpayers who “sell items on Internet auction sites,” such as eBay, and those who sell handmade products and accept payments on websites that include Etsy.
Specifically excluded from the reporting requirements are personal transactions, such as when users receive reimbursements from a friend for dinner or an Uber ride. Also disregarded for reporting purposes are mobile transfers of funds made with the Zelle Network, which are settled directly between users’ bank accounts and are not processed through Zelle itself. Finally, individuals who accept mobile payments when selling previously used items, such as clothing, furniture or technology, will also escape tax-reporting requirements unless they regularly engage in those sales for business purposes.
In 2022, many mobile-payment apps, such as PayPal and Venmo, messaged users to confirm their information and request they tag future transactions as either personal in nature or for the purchase of goods and services. Regardless of these measures, taxpayers who accept mobile payments using these platforms should be mindful to maintain meticulous records of their income to verify against the Form 1099-Ks they may receive in 2024. Similarly, taxpayers should keep records of all business expenses they may use to reduce the tax liability on these now-reportable payments.
About the Author, Savannah Snow, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she provides tax-planning and consulting services to U.S. and multi-national businesses and their owners. She can be reached at the firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.
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