Merchants Using Payment Apps Will See 2022 Tax Changes
For merchants who receive $600 or more payments in total for goods and services through a third-party payment network, such as Venmo, Cash App, or Zelle, these payments are now be reported to the IRS since January 1, 2022.
According to Forbes, the new rule results from the American Rescue Plan signed into law and will mainly impact business owners using third-party payment network providers.
The IRS is cracking down on payments received through apps to ensure those using the third-party payment networks are paying their fair share of taxes.
Previously, the IRS only required third-party payment networks to report payments that met both of the following reporting requirements:
- Gross payments that exceed $20,000, AND
- More than 200 transactions within the current year.
Now, third-party payment networks will be required to send users Form 1099-K for transactions made by mail or electronically.
The new tax reporting requirement will impact the 2022 tax return filed in 2023.
The New 1099-k Tax Reporting Requirements
As of Jan. 1, 2022, merchants will receive Form 1099-K from third-party network providers for income received through electronic forms of payments by Jan. 31 of the following year. The tax reporting change will only be applicable to payments for goods and services exchanged, not to family and friends.
In the near future, companies like PayPal, Zelle or Cash App may request additional information from businesses to properly report transactions on a merchant’s Form 1099-K. If the following information is not on file, merchants may be asked to provide:
- Employer Identification Number (EIN)
- Individual Tax Identification Number (ITIN) or
- Social Security Number (SSN).
Moving forward, a company’s Form 1099-K will include payments from credit cards and online payments, and merchants are required to report any income listed on their Form 1099-K from their taxable transactions on their income tax return.
How to Keep Good Records for Tax Reporting
Since businesses’ Form 1099-K may include both taxable and nontaxable income, keeping good records is essential. Merchants should maintain records such as bank statements, receipts, invoices and other financial documents to reflect taxable income.
For business owners, it is a good idea to set up a third-party network platform, such as Cash App, Zelle, or Venmo, separately – one for business and one for personal transactions. This way, business transactions can be tracked easily.
Also, keeping good records can be beneficial to prove both taxable and nontaxable income sources if the IRS audits tax returns.
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