Improvements to the 1099-K tax form for businesses and landlords are on the way.

Payment providers utilized by self-employed people and small company owners may undergo significant changes in future tax years. See how the changes may affect your taxes.

What you’ll discover:

What exactly is a 1099-K?
Is there a difference in 1099-K reporting from the prior year?
Do I have to pay taxes if I receive money through PayPal or Venmo?
How does the new 1099-K requirement effect landlords?
Will I get a 1099-K for non-business transactions?
Do I have to pay taxes on an item I sold for less than its original value?
What should I do if I have not reported possibly taxable 1099-K income?

Peer-to-peer payment platforms such as Venmo, PayPal, and Cash App are used by millions of people and businesses. Customers may use these services to pay in a simple and quick manner, and they can even be utilized amongst friends and relatives. The American Rescue Plan Act modified the tax law in various ways, including additional duties on payment providers such as Venmo and PayPal. When the IRS formally adopts these new requirements, companies, landlords, and others who use such payment apps and services will obtain 1099-K forms from the payment service provider if they received more than $600 via the service during the fiscal year.

What exactly is a 1099-K?

Several payment service providers produce a 1099-K form when a person or organization passes a specified threshold. It shows how much money a person or company gets for products or services provided. If a person or organization utilizes numerous payment services, each one will produce a separate 1099-K form that records the payments received via that provider. Individuals and corporations utilize the 1099-K documents to complete their tax returns.

Is there a difference in 1099-K reporting from the prior year?

The current payment threshold before a service provider is required to disclose to the IRS is $20,000, and this only applies if the firm or person has more than 200 transactions in the calendar year. The new $600 threshold for 1099-K forms, as envisioned by the American Rescue Plan Act, without an accompanying transaction minimum, represents a significant reduction from previous tax years and will mean that many more individuals and businesses can expect to receive 1099-K forms once the IRS officially implements the new requirements.

Curiously, Zelle is not obliged to disclose transactions, therefore payments made using Zelle will not result in a 1099-K. This is because Zelle, unlike PayPal, Venmo, and Cash App, just enables financial institution communications rather than keeping accounts or paying transactions.

To be clear, this revision to the tax law does not modify who will have to file tax returns and pay taxes on income. Small company owners, even those who earn money via a side business or through rental property, must nonetheless appropriately declare their profits and pay taxes on that income. The new regulation, which is intended to enhance voluntary tax compliance and guarantee income is properly recorded, will not be implemented for the 2022 tax year. The IRS recently changed direction and deferred enforcement until a later date, so check back here for developments.

Do I have to pay taxes if I receive money through PayPal or Venmo?

The simple answer is yes, however it is vital to clarify that this is not a new tax on Venmo, PayPal, or Cash App transactions. Small company taxes are already complicated. Luckily, this new law has no effect on the amount of income tax you owe. Instead, the new, lower 1099-K reporting level is meant to assist small company owners and people with side enterprises in reporting and paying taxes on all of their income.

Of fact, many individuals transfer money via third-party payment systems for both professional and personal purposes. Several payment applications and services enable users to choose whether money is being transferred for personal use, which is exempt from taxes, or for the purchase of goods or services. Providers may wish to ensure that clients choose the “Goods and Services” option when submitting payments in order to be compliant while utilizing these services.

How does the new 1099-K requirement effect landlords?

Whether you own a multi-unit apartment complex or merely rent out a room in your home, the IRS requires you to record yearly net earnings of at least $400 as income and pay all relevant taxes, including self-employment tax. The new 1099-K requirement does not impose a new tax on individual landlords; rather, if you accept rent or other tenant payments through PayPal, Venmo, Cash App, or other similar services, you can expect to receive a 1099-K from the service provider after the end of the calendar year to help you accurately report all income received during the year.

The good news is that there are landlord tax incentives and methods that you may be able to employ to reduce the amount of income taxes you eventually owe when it comes time to file your end-of-year returns.

Another thing to keep in mind is that, unlike the 1099-NEC requirement for company owners who pay independent contractors, the 1099-K requirement only applies to third-party payment providers and not landlords or other business owners.

Will I get a 1099-K for non-business transactions?

Personal funds transmitted between friends and relatives are exempt from taxation. Hence, whether you pay your roommate’s energy bill or give money to a buddy to cover half of a lunch excursion, such payments are not taxed. As previously stated, when a person uses a service such as PayPal or Venmo to pay for products or services, the payer may categorize such payments as business-related, which allows the service provider to differentiate between reportable and non-reportable payments.

Similarly, if you sell a home item and get money via a third-party payment provider, you do not owe taxes on the amount of the payment ” unless you are in the business of selling such products or profit from the sale. You may not owe taxes on the stated amount if you get a 1099-K from PayPal or Venmo for transfers between friends and family or other non-taxable payments. Nonetheless, you may be required to explain (and maybe show) to the IRS why the money transfers were not considered income.

Do I have to pay taxes on an item I sold for less than its original value?

If you accept credit card payments or other money transfers via a third-party payment provider such as PayPal or Venmo and the amount received exceeds the existing 1099-K threshold restrictions, you can expect to get a 1099-K after the tax year ends. But, if you got money for an object that you sold for less than its initial worth, the payment may not be taxed.

What should I do if I have not reported possibly taxable 1099-K income?

Don’t worry if you’ve been receiving business-related payments for products or services through PayPal, Venmo, Cash App, or other third-party payment providers and haven’t been reporting or paying taxes on it. You may be able to alter earlier tax files to rectify past mistakes.