$600 Reporting Threshold Delayed
The American Rescue Plan, passed in 2021, changed the reporting threshold for Third-Party Settlement Organizations (TPSOs) like Venmo, Paypal and the like. You may recall (at least vaguely) that it caused a bit of an uproar. Previously, TPSOs were required to report transactions if they totaled more than $20,000 AND if there were more than 200 individual transactions. The change substantially lowered the threshold to $600 and eliminated the requirement for a minimum number of transactions, beginning with tax year 2022.
Well, there’s been another update. The IRS announced recently that there will be a delay to the start of these new rules and the old rules will apply to your 2022 tax return.
Why do I care?
Well, you shouldn't, really. Because all income is already required to be reported on your tax return, regardless of whether Paypal sends you a 1099-K.
Taxpayers are often misinformed that if they don’t receive a 1099 or a W-2, it isn’t technically income and doesn’t have to be claimed on their return. That’s false. I, myself, have had online buying experiences where the seller asked me to pay them via Paypal and to choose Friends & Family instead of Goods & Services. I’m sure many of you have had this experience as well. Unfortunately, this isn’t the proper way to do business and could land sellers in hot water with the IRS or their state if it’s a sales tax state.
Which transactions count as income?
If you are selling a product or receiving compensation for a service, the funds you receive are considered income and must be accounted for on your tax return. This would include anything from selling on an online shop or if you clean houses as a side job. The sale of goods and services is income. On the other hand, if you went to dinner with some friends and paid the bill and they’re simply paying you back, that isn’t income and doesn’t need to be claimed on your return.
This confusion seems to have increased with the explosion of the gig economy over the last several years and is creating big, expensive problems for taxpayers.
If you’re not sure whether certain money you received should be claimed on your return, talk with your licensed tax preparer. They’ll make sure your income is reported on your return correctly and can help you determine any allowable expenses you may be able to claim that would offset that income and reduce your taxes. Having a knowledgeable tax preparer is key, especially in these situations.
If you have questions or need help with a tax problem, you can connect with me using the chat feature on my website or by scheduling an appointment.