Will I be taxed on money I send to friends if we split the cost of a meal?

There’s a lot of confusion about the new rule. You can still use the payment applications to split the restaurant tab with friends or send birthday money to relatives without triggering a tax bill. The taxing agency is trying to track income received, not the transfer of funds between family and friends. Under the pandemic-related American Rescue Plan, changes were made to the tax code relating to what are called “third-party settlement organizations.” These include companies such as PayPal, Venmo and Cash App, which accept payments for the sale of goods and services. “Third party information reporting has been shown to increase voluntary tax compliance and improve collections and assessments within IRS,” the agency says in an FAQ about third-party-network transactions. In the past, the threshold for reporting peer-to-peer (P2P) payments for goods-and-services transactions was quite high. The companies were required to send IRS Form 1099-K for gross payments exceeding $20,000 and more than 200 transactions within a calendar year. This threshold has now been substantially lowered. If your business enterprise receives $600 or more in payments, regardless of the total number of transactions for the calendar year, then the payment processors must send a 1099-K. This is the tax form used to report payments received by a business or individual for the sale of goods and services that were paid via a third-party network. So yes, this includes the income you receive for T-shirts you make and sell on Etsy or the house you rent out on Airbnb . By the way, Zelle says on its website that it’s not subject to the new requirement, writing, “The law requiring certain payment networks to provide forms 1099K for information reporting does not apply to the Zelle Network.” Early Warning Services, the network operator behind Zelle, said in an emailed statement, “Payments between friends and family, and eligible small businesses sent through the Zelle Network are not subject to this law because Zelle facilitates messaging between financial institutions, but does not hold accounts or handle settlement of funds.”

Why is the IRS coming after my small side-hustle income?

This isn’t a new tax. It’s a new reporting requirement. Even if you hadn’t been receiving a 1099-K, you were still required to report any taxable income received through these platforms on your income tax return. The change won’t affect the reporting requirement for 2021 tax returns. But gig workers or people with side hustles should expect to start getting 1099-K forms for the 2022 tax year early next year.

How will the platforms know the money I’m receiving isn’t business income?

The various platforms have been sending notices to people who use the payment applications to accept business income that they need to accurately report their income and confirm their tax information. Many payment apps have a way to differentiate between commercial payments and money sent as a gift or reimbursement. Cash App said on its website that business accounts with $600 or more in gross sales in the 2022 tax year will qualify for a Form 1099-K. But it does not apply to personal Cash App accounts. In its own FAQ , PayPal, which also owns Venmo, pointed out it offers users an opportunity to tag their P2P transactions as personal or business-related. “Users should select Goods and Services whenever they are sending money to another user to purchase an item,” PayPal said. It’s still possible that you might mistakenly receive a 1099-K, which would require you to explain to the IRS that the money wasn’t taxable, Bronnenkant said.

Will I be taxed on money I make from selling used items in my home?

Unless you are in the business of selling secondhand items, you will not be taxed for offloading that old living room furniture or the bed you’ve had since college. If you’re selling personal items at a loss, the reporting doesn’t affect you, Bronnenkant said. For instance, if you purchased a dining-room table for $1,000 and sold it for $600, this amount would not be subject to income tax or result in PayPal sending you a 1099-K.

Why shouldn’t I just go back to accepting cash only?

Will people find a way around the new reporting rules? Probably. But there are several reasons you should report all your income. It’s the law, and failure to report it could land you in big trouble with the IRS. Yes, the agency is overwhelmed, but woe to the person who finally gets caught. There are some other short-term and long-term advantages to reporting all your income. Your income is used to qualify for loans. You might be shutting yourself out of qualifying for some tax breaks, such as the earned-income tax credit, Bronnenkant pointed out. The EITC helps low-to-moderate-income workers and families get a tax break. For 2021, a married couple with three children could qualify for the EITC if their earned income was under $57,414. Long-term, underreporting or not reporting your income can affect the amount of Social Security benefits you receive. I understand that if you’re working hard to just make ends meet, you feel it’s not cheating to skirt the IRS reporting requirements. But keep in mind that underreporting what you owe could negatively affect your financial future.

clockThis article was published more than 2 years ago

Personal Finance

Venmo, PayPal and other payment apps have to tell the IRS about your side hustle if you make more than $600 a year.

FAQ: The agency doesn’t care how much you split checks on payment apps. But it wants to know about that Airbnb income.

By Michelle Singletary

January 21, 2022 at 7:00 a.m. EST

The sign on the door for the hairdresser read “Cash only, please!”

I wasn’t sure, but I suspected the reason behind the change in the accepted form of payments might have had something to do with new income-reporting requirements. In the past, payment options had included apps such as Venmo, PayPal and Cash App.

To help identify tax cheats, the IRS as of Jan. 1 started requiring all third-party payment processors in the United States to report payments received for goods and services of $600 or more a year.

This is going to be a jarring change for some self-employed gig workers and people with side hustles.

Opinion: Everyone should pay the taxes they owe. Could there be bipartisan agreement on this?

For others who use such payment platforms for personal transactions, there’s nothing to worry about.

“The government has been looking for ways to close that tax gap by making more transactions reportable to the IRS,” said Eric Bronnenkant, head of tax for the online financial adviser Betterment. “The ultimate goal is laudable, which is to make it harder for people to underreport their taxable income.”

Let’s walk through what you need to know about the new IRS reporting rule.