The new reporting requirement will guarantee that small businesses that accept payments through those apps pay their fair share in taxes.
"These third-party settlement entities may not know for sure if they are dealing with a business or an individual or if they are dealing with payment for goods or services, or a nontaxable transaction. It is going to be up to the taxpayer, if they receive 1099 in any form for a nontaxable event, such as splitting rent among roommates, splitting a dinner bill, or even selling something on eBay for less than you paid for it, to explain to the IRS that 1099 was received for a nontaxable transaction," said Mark Luscombe, principal analyst for tax publisher Wolters Kluwer Tax & Accounting.
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Starting Jan. 1, 2022, third-party payment processors were obliged to report such transactions. Though businesses were always needed to self-report such incomes to the IRS, many often did not keep records of their more diminutive transactions.
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The payment apps were asked to send users 1099-K forms if their gross income surpassed $20,000 or over 200 transactions per year.
The new tax law was part of the March 2021 American Rescue Plan, which passed with no Republican votes.
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The new rule is just for goods and services transactions, not personal, such as paying a roommate for rent or reimbursing a friend. It also excludes anyone selling a personal item at a loss, like a couch bought for $700 and sold for $650.
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The cash apps will now be directed to send the 1099-K form to businesses with electronic transactions greater than $600. The new change will apply for the 2022 tax season.
"For the 2022 tax year, you should consider the amounts shown on your 1099-K when calculating gross receipts for your income tax return," PayPal warned on its website. "The IRS will be able to cross-reference both our report and yours."
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The new tax rule is separate from a suggested IRS reporting requirement that initially handed over transaction data on accounts with over $600 aggregate inflow and outflow. That proposal, originally part of President Biden's Build Back Better plan, was expanded to a $10,000 threshold after much pushback and has not yet been acted on by Congress.
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Republicans have announced that that proposal amounts to the Biden Administration peering into Americans' daily purchases.
Even though the new rule became effective with the new year, it doesn't apply to the 2021 tax season. Small businesses need not consider it until the 2022 tax-filing season starts next year.
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