Recent and, in some cases, ongoing restrictions related to COVID-19 have led to increased popularity in the use of mobile payment applications like Cash App, Venmo and PayPal.
Many small businesses now accept payments through these third-party applications, which has necessitated an update to corresponding IRS reporting requirements. The change, which became effective January 1, 2022, was included in the $1.9 trillion American Rescue Plan stimulus package signed into law in March 2021.
Before the new law was passed, the IRS only required the reporting of payments received through third-party providers for amounts of over $20,000 and if more than 200 transactions were completed during the tax year. Under the newly passed legislation, users who receive payments that total over $600 for goods and services through third-party payment networks will receive a Form 1099-K, Payment Card and Third-Party Network Transaction from those payment providers.
Initially there were concerns that this requirement would also impact individuals who utilize the services for nontaxable payments they receive, such as for reimbursements from a friend or family member, or money received as a gift. Those types of payments will not receive Form 1099-K, but the payment applications may not be able to determine which transactions should be classified as business transactions or payments received for the provision of goods and services without input from the user. Many of these applications now include a toggle that allows the user to classify transactions appropriately.
As we approach the end of tax year 2022, users who receive business payments through these applications should be sure to review and, if necessary, inquire with the provider of how to make proper indications of taxable transactions within the application to ensure proper reporting to the user on Form 1099-K. If you have any questions, contact your Schneider Downs tax advisor.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.