IRS taking a closer look at income from app payments

If you’re using certain payment apps like Venmo, PayPal and Cash App to sell goods and services it will be harder to hide income from the IRS under a new tax reporting requirement.

The new rule requires third-party settlement organizations, which also include Etsy and Airbnb, to issue users and the IRS a form 1099-K for business transactions that exceed $600 in a calendar year. It doesn’t apply to payments between friends and family — only payments received for the sale of goods and services. It took effect Jan. 1 for the 2022 tax year — not the 2021 tax year for which the filing deadline is at hand.

This greatly lowers the threshold under which these providers had to report these transactions. The prior threshold was if gross income exceeded $20,000 or more than 200 transactions in a calendar year.

“The whole strategy of the government is to have more taxable transactions be reportable on a tax form so they could make sure people are reporting their income,” says Eric Bronnenkant, head of tax at Manhattan-based Betterment, a digital investment adviser and an adjunct taxation professor at Seton Hall University.

Keep in mind that for the taxpayer, this doesn’t change the fact that “all income was taxable previously and all income is taxable now,” he says.

But the difference now is that the organization itself must report transactions at this lower threshold to the IRS, making it “very difficult now to underestimate your income,” Bronnenkant says. Or to conceal it.

The change was made as part of the American Rescue Plan Act of 2021, Bronnenkant says. 

It impacts third-party settlement organizations generally defined by the IRS as those “organizations with a contractual obligation to make payments to participating payees in a third-party payment network.” So generally speaking, platforms that facilitate the transfer of funds between two parties.

Barry Sunshine, senior tax partner at Janover LLC in Garden City, said applicable taxpayers should expect to receive form 1099-K by Jan. 31, 2023.

He said he’s seeing more businesses using these third-party payment apps for commercial transactions, noting it’s probably due to the “ease of use and the simplicity of it all.”

He suggests business users should avoid melding personal and business transactions on these payment apps by using separate bank accounts for business vs. personal transactions. That way it’s clear for reporting and record keeping purposes, Sunshine says.

He also said users might be contacted by these platforms for tax information like their Social Security number or Employer Identification Number (EIN). To protect against identity theft, he suggests businesses apply for an EIN so they’re not giving out their Social Security number.

Many of the impacted platforms have already issued FAQs on the changes including PayPal, Venmo and Airbnb. Cash App on its site said the change doesn’t apply to personal Cash App accounts, only Cash For Business Accounts. And Zelle has stated it’s not subject to this reporting requirement since it “does not hold funds,” but rather “provides messaging between financial institutions,” according to a statement to Newsday from Early Warning Services, LLC, the network provider of Zelle. For more from Zelle see: https://tinyurl.com/3tjvhkmf

Some platforms like Venmo and PayPal already also allow users to tag a payment as being for “goods and services.”

Categorize payments properly

With that said, it’s important to categorize payments properly, says Robert Tobey, a tax partner at Grassi Advisors & Accountants in Jericho and a member of the American Institute of CPAs Tax Policy and Advocacy Committee.

He says users should have been reporting all income anyway, but where he sees it might have the most impact is for say those who sell goods in the local buy-and-sell marketplaces like, for example, someone who might sell an antique dresser.

That’s considered a goods and service and in the past this may have been something that might have been underreported on tax forms, Tobey says.

Among his suggestions if you’re looking to avoid these new reporting requirements is accept payment by credit card or cash.

“Cash is still great,” Tobey says.