Ready, Start, Hold! IRS Delays New Payment App Reporting Rules

Some people were getting pretty excited about the new payment app tax reporting rules, so maybe they would be happy to hear that the Internal Revenue Service has delayed its plan to implement this. 2022 will now be a “transition” year according to the IRS. When the rules do take effect, the result will be an avalanche of 1099-K tax forms for people using these services to collect payments for their businesses, but also for all the general populace reimbursing each other for personal expenses and selling old belongings on EBay, facebook marketplace, or the like.

Prior to the new rules, third-party payment processors only issued 1099-K tax forms for customers with gross payments over $20,000 and more than 200 transactions. But the 2021 American Rescue Plan lowered that threshold to $600. So, whether you receive a payment on a cash app for goods and services or for splitting the check at dinner with friends, expect to receive 1099-K forms for 2023 transactions during next year’s tax season. And it’s up to you to square with the IRS which are taxable income.

What should you do if you don’t want to be “wrongly accused” and caught up in the crack down on billions of taxable income dollars that go unreported via payments on apps like Venmo and PayPal?

Take advantage of the delay — new rules will now kick in for transactions completed in 2023, not 2022 – and take this time and prepare… get your accounts set up properly and separate your business and personal dealings.

  • Make two separate accounts. One for business and one for personal dealings. Many of the payment apps make you pay for business transactions, but hey, that’s a write off! And if you think compliance is expensive, try non-compliance.
  • People must think that I trademarked the word “documentation” because of how often I say it, but here I go again: Documentation of your transactions will be key to answering, and supporting those answers, if questioned by the IRS. Use the memo feature for something other than emojis. If you are receiving $20 for splitting lunch then say so. Tracking what is personal, and therefore not taxable (mostly) is up to you to do and up to you to support… DOCUMENTATION!

Do not ignore these 1099-Ks – no matter what year you receive them for. The IRS matches the amounts reported on these forms to the amounts you report in your income tax return. Don’t ask for unnecessary IRS attention by not dealing with these forms. Even if they are 100% strictly personal you must report them in your return, and then adjust your tax return to reflect the personal activity so you’re not taxed on it.

The IRS put out a wonderfully thorough and clear FAQ on this topic – seriously – you can find it here.

A few of the highlights.

  • Questions 3 through 5: Deal with the selling personal items/ goods. Hint, hint… if you lose money on the sale of personal goods it is not tax deductible, but if you make money on the sale of personal goods you better believe that you get to pay taxes on it!
    • This is on a per transaction basis, if you lose money on the sale of your beat up old car but make money on the sale of your Tom Brady sweated in game day jersey – you can not offset the gain with the loss.
  • Question 6: Deals with record retention and explains that is your responsibility to know and be able to support how much the goods you sold cost you.
    • Example: you purchased a sweet leather bomber jacket for $1,000 so you could look like Tom Cruise in Top Gun, your wife made fun of you, so you have to sell it, and you sell it for $700. The IRS only sees the sale part, if asked, by the IRS, oh so much fun, it is up to you to be able to provide support for your cost basis. In this particular case I’m sure they would believe you because the jacket really was that awesome.
  • Question 9: Reminds folks it is still a legal requirement to report your income, regardless of whether or not you receive a 1099.

As always, best practice is to prepare and remain diligent, and please remember that ignoring these forms, even if 100% personal, is like inviting unwanted guests to dinner.

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