WHAT YOU NEED TO KNOW FOR THE 2023 TAX YEAR
If you’re a small business owner, freelancer, or self-employed, you probably sometimes get paid through third-party payment platforms like PayPal and Venmo. If so, the IRS’s newly modified tax rule requiring such platforms to send users a 1099-K form might make you nervous.
The new rule, enacted as part of the American Rescue Plan of 2021, requires third-party settlement organizations to report transactions over $600 on a Form 1099-K to the IRS.
The major implication of the new reporting requirement is that people earning money through various side hustles will now be issued an official tax form they’ll need to fill out and submit with their yearly tax return.
It’s important to point out that the IRS has always required individuals to report all sources of income on their tax returns. This new rule will just make it easier for the IRS to track unreported income.
Initially, the change was slated to go into effect for the 2022 tax year, but the IRS recently announced a year-long delay to give businesses and taxpayers time to adjust to the new reporting requirements.
So what can small business owners expect once the new reporting rule goes into effect?
Let’s find out!
WHAT IS THE NEW RULE?
Included as part of the American Rescue Plan Act of 2021, this modified rule changed how income will be taxed for businesses that use third-party payment platforms. Venmo, Cash App, PayPal, Etsy, and Airbnb are only a few examples of e-commerce third-party payment processors and platforms that use them.
With the rule change, third-party payment platforms will be required to issue a 1099-K tax form to the app user (that’s you if your business uses one of the above or similar platforms) and the IRS, if transaction payments add up to be over $600 in one year, including tips.
The former threshold that had to be met before prompting a 1099-K was having more than 200 business transactions over a year for which total payments exceeded $20,000. This rule modification aims to prevent potential tax evasion by individuals who may underreport their business income.
WHY HAS IT BEEN DELAYED?
It’s worth repeating that this new rule will not be in effect until the 2023 tax season.
Members of the tax community, lawmakers, and taxpayers quickly voiced questions and concerns when the new rule was first confirmed. Some of the main problems presented were:
- How do we ensure only business transactions receive 1099-K’s and not personal (i.e., paying back a friend for a meal, paying rent, sending birthday money)?
- Won’t this make it harder for small businesses to make a living?
- Do tax professionals and tax programs have the information and tools needed to take on this change in what is predicted to be another challenging tax season?
In response, on December 23, 2022, the IRS announced the postponement of the rule change. It has been stated that the 2022 tax year will be considered a transition year, and individuals will only receive tax forms if they meet the previous rules’ requirement of over 200 transactions at more than $20,000.
Those making a profitable income are still required to report and pay tax on it even if they do not receive a tax form!
3 THINGS YOU CAN DO
There are some steps that you, as a business owner, can take to set yourself up for success for the 2023 tax season.
- Records, records, records! Keeping good records of your business’ income will become more important now than ever. Good records can be the difference between saving money on your taxes or being audited!
- Try not to mix personal and business transactions on the same payment platform. For example, if you use the same Venmo account to receive service payments from clients, as well as personal payments from friends and family, the platform could have trouble distinguishing the two, leading to an increased and inaccurate income tax payment.
- Hire a tax professional! A tax pro will be able to sift through the noise, keeping you up to date with only the correct and relevant information. Not only that, but a tax pro will ensure that you’re only paying what you absolutely have to and not a penny more!