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A tax code change, which goes into effect in the 2022 tax year, is designed to ensure that people who receive income through Venmo, Etsy, or other third-party payment and credit systems accurately report their income to the Internal Revenue Service when completing your tax return.
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Under the rethought rules, the idea was that the government would recoup the $7 trillion it deemed owed and not collected, according to the New York Times, by requiring payment processors to report funds totaling more than $600 to the government in that flow. through a personal account.
But at the last minute, the IRS agreed to delay the new documentation requirement, citing “taxpayer confusion, lack of clear guidance … and the impact on the upcoming filing season,” said the agency.
That doesn’t mean you’re off the hook for reporting earnings paid electronically through third-party networks when you file your 2022 taxes. What it does mean is that now’s your chance to familiarize yourself with the new rule and prepare to file your 2023 taxes. with confidence.
What is Form 1099-K?
An IRS Form 1099 is used to report ways people earn money, beyond traditional jobs. The agency has a variety of 1099 forms, and one of them is the 1099-K.
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Currently, if you receive more than $20,000 through at least 200 individual credit card transactions or third-party payments, you will receive a Form 1099-K. That will change for fiscal year 2023, when payments total at least $600 on any number of transactions. (According to TurboTax, there is no minimum threshold for debit/credit card transactions.)
This will impact you, for example, if you sell homemade products through Etsy. If your buyers order seven artworks for $100 each, for example, Etsy will issue you a 1099-K form.
Note that some states currently have their own rules requiring you to receive a 1099-K if your gross sales reach certain levels. The minimum at some of these locations is already $600, so this federal form change won’t confuse some sellers when it goes into effect next filing season.
Other types of 1099 forms include the 1099-DIV if you receive dividends or other investment payments; 1099-G for government payments, including unemployment and state or local tax refunds; and 1099-NEC for freelance workers.
How does Venmo fit into this?
Venmo has become the go-to place for millions of people to easily send money to friends and family or pay for services. For example, within days you could be getting money for your birthday from your sister, paying your groomer or babysitter, reimbursing your friend for your share of a group wedding gift, getting paid by someone who bought the old coffee table that you have no longer want or bill a bride $150 for making her wedding veil. All using Venmo.
You will notice that there is a mix of personal and commercial transactions. And now that you’re on the 1099-K watch, you’ll need to keep a great record of the money flowing in and out of your Venmo account. Venmo transactions aren’t the only ones subject to the law. Doing business with PayPal, Stripe, and Upwork, for example, also triggers the referral mechanism.
what to do now
The IRS doesn’t expect you to pay tax on the $25 your sister sends for your birthday, but accurate record keeping is crucial. Now is the time to start separating those personal and business transactions. Both PayPal and Venmo allow you to have business and personal accounts, making it easy to differentiate your income for goods and services from the money your friend pays you back after a night of bowling.
At the same time, it’s important to keep records that back up the money going in and out of your third-party accounts. Whether you use accounting software or the old-fashioned paper file method, you’ll need to document what the money was received for through copies of the invoices you issue.
When you pay for your after-hours office cleaning service through Venmo, we recommend that you ask for an invoice to have on your records for a deduction. Don’t just send money through Venmo or another third-party app without documentation.
The bottom line
If you accept credit/debit or third-party payments for your goods and services, the IRS always expects you to report the income, even if it’s less than $600, on your tax return.
The new law that goes into effect with 2023 earnings doesn’t change that. Increase your responsibility to keep good records on the money you take. You’ll want to make sure you aren’t taxed on that birthday or bowling money. Your tax advisor should be able to answer your questions about the new 1099-K form.
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This article originally appeared on GOBankingRates.com: How Venmo or Etsy Payments Might Affect Your Taxes
