IRS 1099-K Forms from PayPal, Cash App & Venmo: What You Need to Know
In 2023, many more business and personal transactions through payment processing apps, including PayPal, Cash App and Venmo, will trigger 1099-K forms being sent to taxpayers — and you need to be ready.
In the past, payment processing apps were not mandated to send you a 1099-K unless you had more than $20,000 worth of transactions for goods and services and more than 200 business transactions in one year.
However, the number of 1099-K forms the IRS is sending out has already increased — and it is expected to surge dramatically by the time 2023 taxes are filed this. That’s because for this year, there is no longer a 200-transaction limit, and the dollar value is being reduced substantially to $600.
That big shift means a lot of confusion for taxpayers and a lot more audit letters due to underreported income called IRS Letter CP2000 letters. When things get complicated, especially if you have a large transaction you believe is erroneous on a 1099-K, you might need to contact an experienced tax attorney for help.
The purpose of this change is to make it easier for the IRS to keep track of taxpayers’ income. While the income that will be reported on Form 1099-K is already taxable, the difference now is that more of it will be reported and impossible to hide.
These days, the reality is that every single online transaction is tracked and traced in some manner. That doesn’t mean you should be afraid of what will happen when your income is more carefully reported. But it does mean you need to be prepared for the increased reporting.
Many questions are already arising about the issue, and the IRS has provided a list of FAQs with answers.
Why You Will Receive a Form 1099-K
For any transactions during 2023, the new, lower cap of $600 in gross income applies. That means that many more transactions — and a lot more people — will receive 1099-K forms in early 2024 when tax-filing time comes around again.
Essentially, a 1099-K is an IRS form used to report your gross income from payment transactions through any third-party payment app.
You might receive a Form 1099-K for transactions for any of the following reasons:
- You own a business.
- You are self-employed.
- You are a gig worker.
- You have sold personal items.
You should expect to receive a Form 1099-K for 2023 from each third-party payment app through which you have received money $600 or more in total.
It is important to keep in mind that the gross amount of a payment is what will be included on your 1099-K. That means the form will not include any adjustments for credits, discounts, fees or any refunded amounts from the payment. The amount of a transaction is based on the date the original transaction took place.
How to Prepare for the Onslaught of Form 1099-Ks
Here are some tips for getting ready for this reporting change:
Keep careful records of all transactions through payment processing apps.
More forms — especially because they are generated by computers comparing data across accounts — is likely to mean more errors. One of the best defenses against an error in reporting your income is your own clear records.
- For businesses and self-employment income, be sure to maintain detailed records of all income and expense transactions, including through payment reporting apps.
- For the sale of personal items, keep a list of all transactions you make, even if they are small, because they could add up over the course of the year. It also helps to keep note of what you originally paid for each personal item, in addition to the amount for which you sold it. Make a note if you made money on the sale, which means the transaction is taxable. If you lost money on it, there are no tax consequences. Reimbursements or gifts from family and friends are not taxable.
Maintain a clear separation between your business and personal accounts.
If you are actively running a business and accepting payments online, make sure your business account is organized properly and kept separate from your personal account.
Not only does that mean you need separate business and personal bank accounts, but also it means you should have separate payment app accounts. So, you should have a business PayPal or Venmo account where you accept business payments, and a personal one for any personal payments.
For all business accounts, take care to organize them under an EIN number. Personal accounts should be set up under your Social Security number,
Don’t let anyone else accept payments using your PayPal, Venmo or other third-party payment app account.
You’d be surprised how often a gig worker, freelancer or online seller uses someone else’s Venmo account, such as a spouse’s or friend’s account, to accept business payments. That includes payments that the worker or seller accurately reported on their business tax return.
Such a mismatch can lead to a tax reporting headache in which the owner of the payment app account that was used ends up appearing as though they understated their income on their own tax return.
The same applies to any work done with a church or other charity. Do not accept payments for a non-profit organization in your own personal or business Venmo, PayPal or Cash App. The entity should run payments only through its own account under its EIN number.
Taxpayer Has the Burden to Prove Income
While it might seem like a lot of extra effort to keep so many records and have different accounts for business and personal payments, it’s a whole lot easier to explain that a payment was for business if it ran through an account used only for your business, and vice versa.
As the IRS 1099-K reporting rule goes into effect, that will be even more important. In the end, you as the taxpayer have the burden to prove that all of income and deductions on their tax return are accurate.
If you need help with a 1099-K tax problem, book a consultation with a skilled tax attorney.