New 1099-K Reporting Rules
As part of the American Rescue Plan that was passed in March 2021, the IRS has modified their rules to lower 1099-K reporting from payment apps such as Venmo, Paypal, and Cash App. Prior to December 31, 2021, third parties would be required to report (and provide a 1099-K) for gross payments that exceed $20,000 AND had more than 200 transactions. However, starting in 2022, third parties will be required to report for gross payments for goods or services that exceed $600 AND any amount of transactions.
In the past, 1099-Ks were mainly produced from credit card companies reporting to the IRS the amount of dollars running through a given business. The new rules were aimed at ensuring taxpayers pay their fair share to the IRS as it’s reported that somewhere between 20 – 30% of Americans makes some additional income by selling something online or getting paid via these apps for side work.
While these new rules may have good intentions, there are some potential pitfalls. Some taxpayers use these apps personally (not related to business) so they don’t have to write checks, carry cash, or transfer funds the old way. These taxpayers could find themselves with a 1099-K this year, and have the IRS expecting them to report their transactions as taxable income.
I happen to use Venmo as I’ve found it easier than dealing with checks and cash for certain things. For example, we’ve been on one of those old family phone plans with Verizon for the last 10+ years. Being the accountant, I naturally was chosen to collect the money and pay the monthly bill. While it’s not a lot of work, I normally don’t calculate the bill monthly and opt to have them send me a few months at a time to make my life easier. With that said, my brother and sister-in-law upgraded phones this year and he sent me more than $600 through Venmo.
Keep in mind that the new rule only applies for payments for goods or services. So even though I fully expect to receive a 1099-K from Venmo in the next few months, the amounts reported to the IRS should not be taxable to me as all I was doing is collecting payment from my family since I did not provide them any goods or services. This will however make my tax return more complicated as I’ll have to report the income and back it off to avoid any IRS matching notices.
This new rule will likely impact a lot of unexpecting taxpayers this year. Be sure to provide those documents to your tax preparer so you can ensure your tax return will be filed as smooth as possible.
Andy is a CPA and trusted advisor with 15 years of experience providing tax, accounting, assurance, and consulting services to transportation industry owners and operators. He is a tax principal with CLA in the Minneapolis, MN office. He also consults with high net worth individuals and owners of closely-held transportation businesses on all aspects of tax planning, estate planning, and retirement planning. Andy is also the tax leader for transportation industry across CLA.
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