IRS Warning: $600 from PayPal and Venmo to Clarify Transactions

The IRS recently shared a reminder that there is a new $600 payment threshold that we need to be aware of as we are about to start preparing for this year's tax season

Payments you have received from third-party payment processors

The new $600 threshold applies to payments that you may have received from third-party payment processors such as Venmo or PayPal I think those are the most popular ones for part-time work for side jobs or side hustles worth selling products or services in early 2023 you will receive Form 1099-K which is technically called information return from these third-party processors if the payments that you received for services you provided or products you sold are in Access of 600 dollars now I want you to know that even a single transaction over $600 may now trigger the form in a minute I'll walk you through form 1099-k so that you are familiar with it, you know what it looks like you know what information it will have and so it will help you know what to expect

This is a new tax law that was introduced by Congress about a year ago I believe it was sometime in mid-2021 as part of the American Rescue plan act I covered that in much more detail here on the blog. The purpose of this new change that really uses an extremely low threshold of only 600 dollars is to bring in more tax revenue to the government, they estimate that it will help bring about 8.5 billion dollars now through 2031.

The challenge with this new tax law is that personal payments and even money that you receive from your family your friends as reimbursements for dinners taxi rides anything else can be reported on these forms incorrectly by third-party processors essentially there is no way for them to report these 100% accurately for every single taxpayer because of the limited data that a transaction action description typically has also what Still Remains unclear is how payment for let's say a used item that you sell for example would be reported by Venmo or PayPal so let's say if you buy let's just say you purchased a new dining room set, and then you end up not liking it not using it, and you want to sell it, and you sell it at a loss would that amount that you receive be treated as your income by these third-party payment processors I think it is safe to assume that the answer is yes essentially how are they able to correctly categorize these payments if the transaction occurs between two I think it is safe to assume that the answer is yes essentially how are they able to correctly categorize these payments if the transaction occurs between two personal type accounts not a business and a personal account

So while that remains to be unclear at this time my take on it is that it will ultimately be the responsibility of every single taxpayer to ensure sure that their 1099-K is accurate some taxpayers may receive the form by mistake and so the IRS says that if that happens to you, you need to contact the issuer, and then you need to request the correction if the company doesn't fix the error then you can attach an explanation to your tax return while reporting your income correctly so let's talk about what kind of Errors of course besides the obvious one the amount might companies like Venmo or PayPal make on your form 1099-k

Your income is reported under a correct tax ID

The first thing I recommend you verify is that the income is reported under a correct tax ID it might be under your social security number instead of your business EIN the IRS says that if you report your business income on Form 1120, 1120-S, or 1065, and you receive a form 1099k in your name as an individual not as a business but in your name as an individual you need to request that the issuer makes a correction

If you change your business entity

The second error that you may experience is if you changed your business entity during the year, but then continued to use the same credit card terminal, this will result in your business entity on form 1099-k not agreeing to the business entity on your tax return again you will need to request a correction

Multiple streams of business income

The third thing to watch out for is if you have multiple streams of income as a business for tax return purposes you may report each stream on a different line item but your 1099-k may show a total amount and so if that happens you don't need to request a correction, but you do need to make sure that your tax return reflects all of your business activity accurately whether it is on Schedule C on schedule E or something else whatever is applicable in your case

Who receives it from 1099-k?

So who receives it From 1099-k is filed every single year with the IRS a copy of it is sent to a customer of yours and a third copy is kept by a company that issues it the entire purpose of 1099k is to report credit card and third-party payments. This means that anything that is reported on form 1099-k that you receive must be included as taxable income on your tax return

The IRS does check returns automatically, so if there is a mismatch between the information that you have on your return and what they receive from Venmo or PayPal, or any other similar company that you use during your year it might trigger an automatic notice or in some cases a full-blown tax audit

The first tip to you is don't ignore the 1099-k if and when you receive it in January or early February

Extremely important that your side hustle or small business accounting records reconcile to your 1099k which in turn will be part of the amount that you claim as your taxable income on your 2022 tax return my biggest advice to you is if you know you received payments of $600 or more during 2022 using those third-party payment providers please be on the lookout for a 1099k from every single third-party payment processor that you used if you don't receive it by mid-February or late January contact them because most likely it means that there is a mistake or maybe your form got lost in the mail, but it doesn't mean that the IRS won't have those numbers you are still required to report them. Another tip is to keep Good Records I realized that nobody enjoys doing that, but there is absolutely no way around it especially if you do plan to claim deductions or tax credits on your tax return