Get ready to sort through your digital receipts. Starting with this 2022 tax year, Third-Party Settlement Organizations (TPSOs) such as Venmo, Cash App, and PayPal are required to report payment of commercial transactions that total $600 or more per year to the Internal Revenue Service (IRS), and, therefore, will be sending qualifying users a Form 1099-K.
This new rule is among the 243 pages of The American Rescue Plan Act of 2021, more aptly known as the $1.9 trillion economic stimulus package signed by President Biden into law on March 11, 2021.
Previously, apps like Venmo and Cash App were only required to report to the IRS when a user had both (i) over 200 commercial transactions and (ii) gross payments in excess of $20,000. Under the new rule, TPSOs are now required to report to the IRS payments amounting to more than $600 in total during the course of the year regardless of the number of transactions. Ultimately, anyone who receives payment(s) of $600 or more from goods or services this year will receive a Form 1099-K. The end result is that many more Americans will be receiving a Form 1099-K this tax year, many of whom will be receiving one for the first time. Some tax lobbyists estimate the number of Americans receiving a 1099-K this year could be as high as 20 million.
Form 1099-K is simply an informational form, listing both taxable and nontaxable income. All taxable income must be listed on one’s income tax return. Thus, it is essential, now more so than ever, to keep accurate and detailed records of your digital expenses and payments. Consider the following example: Five years ago you bought a coffee table for $200. A few years have passed and you sold it this year for $100; you were paid via Venmo. You receive a 1099-K for this tax year because your aggregate Venmo receipts total over $600. Is that $100 subject to income tax? Without a receipt showing the coffee table’s original $200 sales price and, thus, proof that you sold it for a $100 loss, it very well could be. As you can see, the practical implications are endless.
If all of this sounds unsettling to you, there are two pieces of good news:
(1) The rule only applies to commercial goods or services, not personal charges.
(2) This is not a new tax, but rather a new reporting requirement. The IRS is not taxing users on individual transactions.
The first point above bears repeating. The IRS is not taxing you on your payment of this month’s rent to your roommate or you being paid by your brother for a shared Christmas gift. Those are personal, and this new rule only applies to commercial goods or services. However, this only further necessitates the importance of keeping accurate records. TPSOs will send you a Form 1099-K if you trigger this new $600 threshold without necessarily differentiating which payments are personal and which are commercial. Fortunately, Venmo has a feature that allows users to tag a payment as being for “goods and services”. Although this feature may help users stay organized going forward, do not be surprised if you, like millions of other Americans, receive a Form 1099-K in the mail this year.
Matthew C. Cooper is an attorney at MacElree Harvey specializing in business and corporate law. He counsels businesses of various sizes and industries through all stages of the business life cycle, including representing management and boards of directors by helping them stay compliant with the ever-changing landscape of corporate law. Matthew frequently represents businesses in private financings and mergers and acquisitions, and is a trusted adviser to lenders and borrowers in commercial lending transactions. If you have any corporate or business law needs, please contact Matthew C. Cooper at (610) 840-0279 or firstname.lastname@example.org.