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New Tax Rule Changes Reporting Requirements for Venmo, PayPal, Cash App

January 21, 2022
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A new tax rule will see the Internal Revenue Service (IRS) gain information on income small businesses receive via transactions on popular payment applications. As of Jan. 1, 2022, businesses that accept more than $600 per year in payments for goods and services through apps such as Venmo, Cash App and PayPal will receive a 1099-K.

Change Ushered in By Passage of American Rescue Plan

In March 2021, Congress passed The American Rescue Plan Act of 2021 (the “Act”) to address a myriad of social and economic issues caused by the COVID-19 pandemic. In the Act, Congress amended § 6050W(e) of the Internal Revenue Code of 1986 by reducing the de minimus exception which excused third-party settlement organizations, such as Venmo, from the obligation to submit a form 1099-K to many of their users and the IRS.

Reporting Threshold Lowered From $20,000 to $600

Prior to the Act, a peer-to-peer payment application was only required to report income on a 1099-K if the user received in excess of $20,000 in aggregate payments over a minimum of 200 transactions. Effective Jan. 1, 2022, the $20,000 threshold that triggers the issuance of a 1099-K has been reduced to $600 and the requirement that a minimum number of transactions occur has been eliminated.

By lowering the reporting threshold, peer-to-peer payment applications must now report income if a user earns more than $600 from the sale of goods or services in one year. Importantly, this change only applies to “income received from goods and services,” meaning it does not apply to gifts and other personal transactions, such as reimbursing friends and relatives for rent, dinner or other social expenses.

While it is unclear how Venmo or the IRS intend to differentiate which transactions are taxable versus those that are not, Venmo has updated its software by allowing users to create business profiles. As a part of the application, the business is required to provide a tax identification number, which Venmo intends to use to issue the required 1099-K form.

As a result of this change, businesses that use peer-to-peer payment applications and meet the extremely low threshold of $600 in aggregate income should be prepared to receive a 1099-K and should be prepared to pay the associated taxes. While the rule is effective as of the new year, it is not applicable to the 2021 tax season. Small businesses will need to take the new rule into consideration in next year’s 2022 tax-filing season.

If you have any questions about how this may impact your business, please do not hesitate to contact KJK.