What Zelle, Cashapp, Others IRS Reporting of $600 Payments Means for Businesses
11/19/21
The Internal Revenue Service (IRS) will be changing the way it is taxing businesses that use third-party payment services such as Zelle, Venmo, and Cash App to receive payments for their goods and services.
This means that businesses that make a total of $600 or more within a year will be taxed as of January 1, CNN reported. Payment apps will be required to report these transactions to the IRS by generating a 1099-K form for its business users to fill out.
Still, businesses will be impacted by the new taxing rule in 2023 when they file their 2022 tax returns, according to Forbes.
The IRS currently requires those apps to send a 1099-K form for user accounts with at least 200 business transactions that total at least $20,000 in gross payments in a year, but that is set to change as soon as the new rule goes into effect.
After the rule goes into effect, app companies such as Zelle and Venmo might require businesses to submit additional information for the 1099-K form that might not be on file already. This could include Employer Identification Numbers (EIN), Individual Identification Numbers or social security numbers, according to Forbes.
The IRS wants to make sure that the gig economy is properly taxed as it applies the new rule which is part of the American Rescue Plan that was signed into law in March.
The agency defines the gig economy as: “activity where people earn income providing on-demand work, services or goods. Often, it’s through a digital platform like an app or website.”
“This could include performing rideshare services or deliveries, renting out property, selling goods online, or providing freelance work,” the IRS added.
The new taxing rule doesn’t apply to non-taxable transactions or an individual’s use of the apps such as sending money to friends and family.
For businesses, the new rule could create an issue for those who haven’t been reporting all their business income from the start.
“[Those include] tax evaders, who violated the self-reporting rules and utilized the old thresholds to avoid paying taxes,” said Scott Talbott, spokesman for the Electronic Transaction Association, according to CNN.
Tax files might also be challenged with some administrative issues once the rule is in effect, according to the news outlet.
“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 a payment for goods or services, or a non-taxable transaction,” said Mark Luscombe, principal analyst for tax publisher Wolters Kluwer Tax & Accounting, according to CNN.
“It is going to be up to the taxpayer, if they receive a 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 the 1099 was received for a non-taxable transaction,” Luscombe added.
A business tax reporting might also be duplicated after the new rule goes into effect. This means that a freelancer or an independent contractor could receive a 1099-K form from a payment app provider and another tax form, 1099-NEC or 1099-MISC, from their client for the same transaction.