As of January 1st, 2022, the IRS will be requiring all third-party payment processors in the United States to report payments received for goods and services of $600 or more a year.
The IRS is doing this to help identify tax cheats, but it will be a significant change for side hustlers and self-employed freelancers.
According to the Washington Post, those who use payment platforms such as Venmo and PayPal for personal transactions will have nothing to worry about. Erick Bronnenkant, head of tax for Betterment said, “The government has been looking for ways to close that tax gap by making more transactions reportable to the IRS. The ultimate goal is laudable, which is to make it harder for people to underreport their taxable income.”
However, this new rule has created a lot of confusion. You can still use the payment platforms to split your bar tab with friends, or send birthday money to your sister without the fear of taxes. The IRS is tracking income received, not transferring funds between friends and family. The American Rescue Plan resulted in tax code changes relating to “third-party settlement organizations.”
The agency said in an FAQ, “Third party information reporting has been shown to increase voluntary tax compliance and improve collections and assessments within the IRS.”
The threshold for peer-to-peer payments for goods-and-services used to be over $20,000 and more than 200 transactions within a calendar year. The threshold has now been lowered to $600.
If a business receives $600 or more in payments, then the payment processors must send a 1099-K form to the IRS. This change won’t affect the reporting requirement for 2021 tax returns, but side hustlers should expect to receive 1099-K forms come 2023.
ARTICLE: JILLIAN WEIDNER
MANAGING EDITOR: CARSON CHOATE
PHOTO CREDITS: ABC7 NY