It has become a de facto standard, a lot of us do it. Over the past few years, apps like PayPal, Venmo, CashApp, and Zelle have made it easy and convenient to pay and accept payments for personal and business transactions.
It wasn’t required for payment card and third party network transactions to be reported below a threshold of $20,000 and 200 transactions. In cases where this threshold was exceeded, a 1099-K was required. This meant that the person receiving the 1099-K was responsible for paying taxes on that income.
The New 1099-K Threshold
Starting this year, 1/1/22, a new law dropped the minimum threshold from $20,000 and 200 transactions made to a taxpayer to $600. A 1099-K is now required to be issued for payment card and third party network transactions exceeding $600.
What it means for you as a taxpayer
Banks and online payment networks must report payments in a trade or business to the IRS and recipients when the threshold of $600 is exceeded.
For businesses, this means a 1099-K must be filed for any party paid in excess of $600 total.
For individuals, this also means that taxes must be collected on income reported above the new $600 threshold for payment card and third party network transactions.
Banks and online payment settlement entities can’t distinguish between personal expenses and business payments, so what should you be doing?
What you should do now to avoid surprise next tax season
There are a couple of things you should be doing to make sure you are tracking this income correctly- as well as potential deductions against it.
- For any payments you receive in trade or business that exceed collectively $600, know they are taxable and that you will receive a 1099-K early 2023.
- If you are receiving income from certain activities, it may be necessary to make estimated tax payments – or increase your withholding.
- Separate receipts of payments received through online payment networks (like PayPal, Venmo, Zelle, etc) to identify personal expenses and business payments. For example, splitting restaurant checks, giving gifts, or reimbursing someone for a personal expense like tickets, entertainment, etc. are personal payments that should be separated.
- If you haven’t been documenting deductions against these business expenses, now is a good time to start. Since the IRS is likely to take the position that all income reported on a 1099-K is taxable, any deductions that could apply should be tracked and substantiated to minimize taxable income.
Questions? That’s what we’re here for. Call us at (614) 456-7222, and we’ll make sure there are no surprises at tax time.