BALTIMORE — This new year, there’s a new federal law impacting peer-to-peer payments apps and taxes, which includes services like Zelle, Venmo, Cash App, and PayPal.
It’s not a new tax, rather a change in tax reporting laws. Congress is cracking down on business dealings that don't share their earnings with the government.
“They figure there are trillions of dollars being missed through loopholes, misreporting, through a lack of enforcement,” said JP Krahel, associate professor of accounting at Loyola University Maryland.
Previously, the IRS required payment apps to report payments if the account holder’s payments exceeded $20,000 and had more than 200 transactions in the year. Now, it’s down to $600 total, regardless of the number of user’s transactions.
The change, which went into effect January 1, 2022, was introduced in the American Rescue Plan Act of 2021 and amended some sections of the Internal Revenue Code. Third-party payment networks are now required to send users 1099-K forms for transactions made by customers with $600 or more in annual gross sales.
“This is for business transactions only. In other words, yah, it may be reported, but if I’m paying my friend for part of dinner and it comes to over the course of a year more than $600 that doesn’t mean I’m going to have to pay taxes on it. It’s just more to make sure business owners who are using P2P apps are reporting their revenue accurately for tax purposes,” Krahel said.
The law applies to gross income, but there are some exclusions including money from selling personal items at a loss, money sent as reimbursement, and money sent as a gift.
“If you’re not a business owner, if this is just you paying a friend, paying a family member for something, it shouldn’t really affect you. Yes, those transactions may be reported but it doesn’t really change your tax situation,” said Krahel.
PayPal and Venmo allows customers to tag transactions as either personal or for business. Transactions tagged as business may also be eligible for coverage under their purchase protection program.
Click here more information on these tax changes.
These changes apply to the 2022 tax year, so if you fall under these new requirements you’ll need to include that information when you file your tax return in 2023.