Beginning January 1, 2022, third party settlement organizations have a requirement to issue a Form 1099-K to payees who have business transactions of more than $600 in a calendar year. (The previous threshold was either 200 transactions or $20,000 in payments in a calendar year, but the law was updated per The American Rescue Plan Act of 2021.)
“Okay,” you say, “but what’s a third party settlement organization?” Well, you may know them by the names of eBay, Cash App, PayPal, and Venmo.
“Okay,” you say, “but why do I need to worry about a 1099-K from an app like PayPal or Venmo?”
You don’t necessarily need to worry, but if you’re a plumber, barber, artist, or one of the other countless self-employed and/or small business owners that received more than $600 in annual payments through these apps, you will have a Form 1099-K issued at year end. That means you’ll need to report the amount as income, along with expenses, when preparing your annual tax returns with the Internal Revenue Service (IRS). For many self-employed individuals, this is a routine they’re already familiar with whether you received any government issued forms or not. Only now, if you’re one of these businesses or individuals, you’ll have another piece of paperwork and income source to be mindful of when staying on top of your tax returns.
Direct Tax Relief encourages taxpayers to always report all of their taxable income, regardless of the payment method or whether a tax form is generated. If all of your earned income is not properly disclosed on your tax return with the IRS, you will face penalties and interest for understatement of income.
If you use any of these cash apps for your business—and especially if you use them for both business and personal transactions— we suggest you contact them and review your profile to decrease your chances of receiving an incorrect Form 1099-K that includes money received that was not business or service-related. Paying back your friends for dinner or movie tickets should not trigger a Form 1099-K from being issued. But if you do happen to receive a form by mistake, it will be time consuming and frustrating to clear up these matters with the IRS so that’s why it’s best to contact the cash app ahead of being issued a 1099. Another solution is to simply set-up a business-specific account to handle service transactions, or only use one app for business and the other for personal transactions.
This may come as a drastic change for many who perform freelance and self employed work, but as long as you continue to report your correct earnings and deductions, you shouldn’t have much to worry about. There have been bills introduced that would increase the reporting threshold from $600 to $5000, but they have not been passed yet. If you are self-employed and would like your taxes prepared professionally or are interested in other business-related bookkeeping or accounting services, call Direct Tax Relief at (800) 505-4134 or contact us.