Tax Day is April 18th this year, but the IRS is throwing a few curveballs already. It recently introduced important new tax laws relating to payments for goods and services through mobile apps like PayPal, Venmo, and the Cash App, along with online marketplaces like Etsy and even Airbnb. These new laws come as quite a change for tens of millions of self-employed gig workers and people with side hustles. So here’s the important info for anyone and everyone who uses these apps (which is pretty much ALL of us these days!)
WHAT’S THE CHANGE?
Starting January 1st, 2022, Venmo, PayPal, and all the other payment apps must tell the IRS if you make more than $600 for the sale of goods and services. The key here is that last part — “the sale of goods and services.” These changes do NOT apply to payments between friends and family — so you can still split the cost of dinner out with your friends or go-in on a family gift. But, if you use payment apps to accept money for your side-hustle or for selling other things you make … like candles … masks … jewelry … you need to report those earnings when you file taxes next year — in 2023.
A provision from the 2021 American Rescue Plan, which went into effect on Jan. 1, directs third-party payment processors to report transactions received for goods or services totaling over $600 per year to the IRS.
Prior to this legislation, a third-party payment platform would only report to the tax agency if a user had more than 200 commercial transactions and made more than $20,000 in payments over the course of a year.
WILL I GET TAXED FOR SPLITTING A DINNER BILL?
No – you won’t get hit with any taxes for sharing the cost of meals or for paying for part of a family vacation together … And just to reiterate, the new tax rules don’t apply to transactions sent between your friends and family. For instance, if you pay your hairstylist via Venmo for cutting your hair — the stylist has to report that. So does the guy selling you concert tickets … same goes for paying for a service like a manicure … or even for someone fixing your cracked smartphone screen. Those sellers have to declare that money as income in their 2022 taxes … when they file in 2023.
But if you’re on the other end — the person paying for those goods or services — life stays the same, you don’t have to worry about it.
WHY THIS, WHY NOW?
The IRS says it’s trying to better track people’s income received for goods and services.
HOW WILL PEOPLE KEEP TRACK OF THIS?
For PayPal and Venmo at least — there’s an easy way to tag a payment as “goods and services” right inside the app. Also — Payments received by a Venmo business profile get automatically tagged the right way — so that helps keep things really clear too. These payment apps should also send you the required 1099-K form next year too — but be sure to check with your tax advisor about these changes — as everyone’s circumstances are different and you want to make sure you’re doing everything right.
WHAT’S THE BIGGEST MISTAKE PEOPLE MAKE FILING TAXES?
The biggest mistake people make is not using the tech tools right at your fingertips to get your taxes done, accurately, and on time. Some 80% of Americans don’t use a tax professional to file their taxes — which leads to lots of mistakes. There are several awesome apps and services out there to help you — and many of them are free. (File for free with the IRS Free File by TurboTax version.)
WHERE CAN WE GET MORE INFORMATION ABOUT THIS?
PayPal and Venmo say they offer easy ways for people to tag transactions using the Goods and Services category whenever they are sending money to purchase an item, like a couch from a local ad listing or concert tickets from a reseller, or paying for a service. You can find out more about PayPal Goods and Services transactions here and Venmo Goods and Services transactions here.
You can also speak with a tax professional when reviewing your 1099-K to determine whether specific amounts are classified as taxable income and learn how to confirm your tax information on Venmo here.