They have also become a popular method for businesses and entrepreneurs to receive payments for goods and services.
But like with everything else, the IRS wants its cut. As such, the government has recently updated the tax code for payment apps.
Here is what you need to know:
When Am I Required to Report Commercial Transactions from Payment Apps to the IRS?
If you receive more than $600 from a single payment app in a tax year, the payment app is required to report this money to the IRS and send you a 1099-K form.
Therefore, you must report this payment app income on your taxes to reconcile your own tax return with the income the IRS has on file for you.
What’s the Difference Between the New IRS Tax Code for Payment Apps and the Old Tax Code?
Compared to the old code, the new IRS tax code for payment apps significantly lowers the reporting requirement threshold.
Under the old code, a payment app was not required to report income to the IRS or send you a 1099-K unless you had more than 200 commercial transactions for the year and those transactions totaled more than $20,000.
Now, payment app transactions are reported when total payments exceed $600 from any number of payment app commercial transactions.
What Payment Apps Must Report Commercial Transactions?
Any payment app that facilitates commercial transactions must follow the new tax code reporting rules. This includes payment apps like PayPal, Venmo, Zelle, Cash App, plus any smaller niche apps that exist or new ones that hit the market.
What Is IRS Form 1099-K?
IRS form 1099-K is used to report income from payment cards or third-party networks, which include payment apps. Form 1099-K includes the total amount for commercial payment transactions that need to be reported on your tax return.
When Is the Deadline to File IRS Form 1099-K?
The IRS requires the payment app to send you a 1099-K by January 31 if you received more than $600 in commercial transactions during the preceding tax year. You must account for this income on your tax return, which is typically due in April.
The 2022 tax filing deadline is Monday, April 18.
If I Owe Back Taxes for Commercial Transactions from Payment Apps and Can’t Pay the IRS, What Are My Options?
If you cannot pay the total back taxes you owe for commercial transactions from payment apps, you have several options to help settle your payment app tax debt.
IRS Offer in Compromise
With an Offer in Compromise, or OIC, the IRS agrees to settle your tax debt in full for less than what you owe. Generally, the IRS accepts an OIC offer if you demonstrate a financial hardship that is unlikely to change soon.
Another tax relief option is IRS Hardship. If you qualify, the IRS places your payment app tax debt in “Currently Not Collectible” status. This is a temporary delay in IRS collections until your financial situation improves.
IRS Installment Agreement
If you earn steady income but cannot pay the payment app taxes after meeting basic living expenses, you can set up an IRS payment plan or installment agreement. You will make affordable monthly payments toward the payment app tax debt based on your income and expenses.
Does the New Tax Code for Payment Apps Apply to Personal Transactions with Friends and Family?
Neither the old nor the new tax code for payment apps taxes applies to personal transactions between friends and family. Payment app tax rules only apply to commercial transactions.
Do Payment Apps Have a Way to Separate Commercial Transactions and Personal Transactions?
Most payment apps allow users to self-identify whether a transaction is personal or commercial. This, of course, opens the door to misclassifying payment app transactions.
Payment app users should be aware that misclassifying commercial transactions as personal transactions carries hefty IRS tax penalties.
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