Tax planning for 2022: Reporting Payments from Third-Party Apps
If you receive commercial payments through payment applications like Venmo, Cash App, or PayPal, you are likely to receive a Form 1099 from these entities for 2022, whether you run a small business, or a side gig. As a part of the American Rescue Plan passed in March 2021, the de minimis reporting exception for third party network transactions has changed effective for transactions beginning January 1, 2022.
For 2022 activity, these third-party apps will be required to furnish 1099-K forms to businesses who receive payments through their services in January 2023 (and yearly thereafter). This change will give the IRS more information about the potential of taxable business transactions that are transpiring on these applications and provide extra documentation for your business income.
Change to the de minimis exception for reporting
In prior years (including the 2021 tax year), the de minimis exception for these transactions meant that payment apps were only required to report payments to businesses if their payments received for the year exceeded $20,000 and they exceeded 200 transactions. This does not mean that businesses were not required to report this income, only that the payment apps were not required to furnish the information to the IRS.
Beginning in the 2022 tax year, apps like Venmo will be required to file 1099-K forms for all business payees that receive over $600 in total payments for the year. This change is significant for both the payment app and for those who do business through these third-party services.
Who is affected?
This change to reporting requirements does not change tax law or add a new tax. Instead, it increases the burden on payment applications to report commercial transactions made through their app to the IRS.
Individual use of the app for personal, non-taxable use will remain unchanged. You will not need to report transactions such as money received from a family member to pay their portion of a shared restaurant bill, or money received from a friend as a gift.
Keep clear records
With these changes in reporting, you may be more likely to receive a letter from the IRS regarding a flagged transaction. You should be careful to keep clear records of all deposits/income and the way it was received to avoid difficulty in responding to inquiries. Be sure to keep a clear paper trail that details all your deposits and income such as bank statements, invoices, and receipts.
If you have been receiving commercial payments through a one of these services to an account that you also use for personal reasons, consider creating a separate account to ensure your business income is properly tracked and to avoid difficulty with the IRS when it comes time to file your tax return. Make sure that each of your accounts is properly identified as a personal or business account.
If you have questions about how this change will affect your tax planning for 2022, you can review the IRS page General FAQs on Payment Card and Third Party Network Transactions and reach out to your tax advisor with any questions you may need clarified.
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.
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