The new rule will clamp down on businesses and individuals who don't report their business income, thus evading tax.
Millions of Americans use cash payment apps such as PayPal, Venmo, and Square. If you're one of them, a new tax rule change could affect you. The new rule will go into effect in January and will require these apps to start reporting a user's business transactions to the IRS. They will have to report the business transactions if they total $600 or more for the year, reported CNN Business. The IRS defines a 'business transaction' as payment for a good or service. The earlier threshold was $20,000 but now, IRS has cut it down to $600 as many haven't been reporting income accurately. This could mainly affect those working in the gig economy.
Clamping down on unreported income
Earlier, app providers only had to send the IRS a Form 1099-K if an individual account made 200 business transactions or more in a year, and only if those transactions added up to gross payments of $20,000 or more. The new rule is part of a provision included in the American Rescue Plan, signed into law earlier this year. It aims to tax previously unreported income. The main change from before will be that IRS will now be able to view business transactions carried out through cash apps if they exceed $600, thus making it taxable and clamping down on unreported income.
As previously, the onus is still on individuals or small businesses to report income received in exchange for a good or service, including tips. In some cases, they were also taxable but now the difference is that transactions made through cash apps will be reported to IRS if they exceed $600, thus forcing more businesses and individuals to report income voluntarily as well. Transactions that are not 'business' in nature are not taxable. For example, friends or acquaintances splitting the bill, or sharing rent, will not be taxable.
Who does it affect?
The new rule change will mainly affect those who were not reporting all of their business income. Scott Talbott, the spokesman for the Electronic Transaction Association, said it will affect "those who are tax evaders, who violated the self-reporting rules and utilized the old thresholds to avoid paying taxes." This could also create administrative hassles for many tax filers who use cash payment apps such as Venmo and Paypal, even if they don't engage in business transactions.
Mark Luscombe, principal analyst for tax publisher Wolters Kluwer Tax & Accounting, said the main issue stemming from the rule change is that these cash apps won't be able to recognize if they are recording the transactions of a business or an individual or if they are dealing with a payment for goods or services, or a non-taxable transaction. "It is going to be up to the taxpayer, if they receive a 1099 in any form for a nontaxable event, such as splitting rent among roommates, splitting a dinner bill, or even selling something on eBay for less than you paid for it, to explain to the IRS that the 1099 was received for a non-taxable transaction," said Luscombe.
Cash apps are already raising awareness on the rule change and some have instituted Q&As about the same. PayPal recently sent a notification to its users on the matter. "In the coming months, we may ask you to provide tax information like your Employer Identification Number (EIN), Individual Tax ID Number (ITIN) or Social Security Number (SSN), if you haven't provided it to us already," read the notification. This could also see some businesses or individuals requesting cash payments, separately, or in addition to smaller tips on cash apps.