You can now add the new 1099K rules to the top of the list of why the IRS sucks! The 1099K is an IRS form for those who conduct business transactions from P2P (Peer-to-Peer) payment apps such as PayPal, Venmo, and Stripe.
In the past, these companies were required to provide information to the IRS for anyone who accepted more than 200 transactions and $20,000 in payment for goods and services. This made sense because, as much as we hate it, it is our patriotic duty to pay taxes on earned income. However, that cap has now been lowered to $600 and any number of transactions for the 2022 filing year.
So, say you wanted to run a little side hustle selling your old, used designer handbags on eBay and you collected more than $600 for the year, you now have to pay taxes on that $600. Now the IRS is just getting greedy. You can’t even pay rent with that! Next thing you know, you’ll have to register for garage sales so the IRS can tax you on that too!
The online selling companies aren’t very happy about it either. Etsy, eBay, Mercari, OfferUp, Poshmark, Reverb and Tradesy founded The Coalition for 1099-K Fairness in response to the new IRS rule. According to their website they believe “that millions of Americans casually selling things online and micro entrepreneurs just starting a business should not receive unnecessary, invasive, and confusing tax forms for small-time transactions.”
To be clear, the requirement should only apply to payments received for the sale of goods and services, not payments made between family and friends. But these new 1099K rules now make that a lot more complicated, which will likely lead to people paying taxes on payments between family.
Let’s take a quick look at the different account profiles.
Business Account Profiles
When you set up your profiles with any of these mobile payment companies you can choose to set it up as either a business account, or a personal account. If your account is a business account, most of the P2P companies will give the buyer the option to mark the payment “for goods and services,” or “would you like payment protection?” This will alert the company that this transaction is taxable income, and if you collect more than $600 in taxable income for the year, you will receive a 1099-K form and it will be reported to the IRS.
However, even if the buyer doesn’t tag it as a business transaction, if the mobile app’s algorithm determines it’s a business transaction, it will still be reported.
Furthermore, if you have a business profile with the app, but use that same app for personal transactions, and their algorithm thinks it’s a business transaction, it will also be reported, and you will receive a 1099K.
You could potentially cut down on the confusion by using separate payment apps for your personal and business transactions, but most small business owners prefer to accept more than one type of payment so that the buyer can choose what works best for them.
It gets worse.
Back to our example, you have this side hustle selling your old designer handbags on eBay to make a few extra bucks, so you set up your PayPal as a business account. You purchased six handbags for $350 each over five years ago but recently sold them on eBay for around $100 each. You have now collected $600 in goods and services so PayPal will be reporting it as income, and they will send you a 1099K. The reality is, you took a loss of $1500 so you shouldn’t have to report it as income, but PayPal doesn’t know how much you spent on the handbags, the app only knows how much you sold it for. If you saved your receipts to show your original purchase price, great, you can use that as proof that you didn’t make a profit. But if you tossed those receipts five years ago, then what do you do? You can still fill out IRS Form 8949 to reconcile, but either way, it’s going to be a hassle. Be sure to consult with a professional tax accountant for advice.
Personal Account Profiles
What about personal transfers? Most of us use these P2P payment apps for everyday personal use and shouldn’t be subject to the new 1099K rules, with a $600 reporting threshold. Last month we sent our daughter $850 through Venmo to buy a new mattress. Is she responsible for paying taxes on that? No, because it’s not income. But how does Venmo know the difference between personal transactions and payments for goods and services? That is a good question. I’ve been researching that for 3 days now and the answer is, who the $@%# knows?!
To avoid the confusion, some companies, like Cash App will only be reporting transactions made through business accounts. Per their website, “If you have a standard, non-business Cash App account, you don’t need to worry about Form 1099-K. Cash App won’t report any of your personal transactions to the IRS. Only customers with a Cash for Business account will have their transactions reported to the IRS—if their transaction activity meets reporting thresholds.”
Zelle’s website states, “Zelle® does not report transactions made on the Zelle Network® to the IRS, including payments made for the sale of goods and services. The law requiring certain payment networks to provide forms 1099-K for information reporting on the sale of goods and services does not apply to the Zelle Network®.”
But others, like Venmo are a little less direct. The LA Times website quotes Venmo as stating, “Any sale, whether from a business account or a personal one, will be counted toward the $600 threshold if the buyer selects ‘purchase protection,’ an optional guarantee against fraud,” but I could not confirm that quote on the Venmo website. They did say, any transaction to a business account is tagged automatically. But for personal accounts, “When sending money on Venmo, users can choose to tag a payment as being for “goods and services.” However, I tested out several transactions on Venmo this past week and never once did it give me the option to tag it.
The IRS is a government run entity that’s already completely out of control. Add incorrect 1099-K forms to the pile and we’ve got massive chaos. If you own a small online business using P2P payment apps, or even if you don’t but happen to receive an erroneous 1099K, please seek out a tax professional for help.
The silver lining is you still only pay taxes on taxable income. It’s just more complicated for you and the P2P payment app companies to report it all correctly with the new 1099K rules. Keep good records and work with a tax genius. We’ll get through this together.
Don’t let the IRS bully you into paying extra taxes.
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