It is a good general rule to know that if anyone receives money for a good or service, the IRS wants to know about it. Income is taxable, no matter how it is received. This basic tenet is reasonable and understandable, but as more people use more money in new ways, it can take a while for some of the rules around that to make complete sense.
This has been most noticeable in recent years when it comes to cryptocurrency. No matter whether you think of it as an investment or another type of currency, if it is worth more than you paid for it, there’s an amount in there that is taxable and the IRS has been working on cracking down on getting its share of that. Beginning next year, it will start to have its hands deeper in payment apps, as well.
Your first question may be just what is a payment app? The answer is probably simpler than you realize, for most of us have used something along the lines of PayPal or Venmo to send and/or receive money. At the same time, you may be surprised to think that this could affect your tax picture if you mainly use it to pay someone back when they go pick up coffee. If that is all you use such platforms for, though, then don’t worry, you will not be affected by this. What will be changing is payment app providers will have to start reporting if a user’s business transactions total $600 or more a year. If you want to get into the weeds on this, you can read this recent article from CNN.
This isn’t the space to get into deep details, but I do want to highlight a couple takeaways from this:
The biggest thing is that this is not making any sort of transaction newly taxable. Rather, this is being put in place because the IRS is trying to track down transactions that are already taxable and may be slipping through the cracks. So if you are already paying taxes on everything you should be, this is not increasing your tax burden.
The next thing to know about this, though, is that it might be making things messier for some and placing the burden on the taxpayer to find a way through that mess. First, it’s possible that one could receive a 1099 from a payment app for transactions that should not be taxable. It could then fall to the taxpayer to have to explain that to the IRS. It’s also possible that you will receive a 1099 from a payment app and also a 1099 from a client for the same transaction. Again, it would then fall to the taxpayer to explain to the IRS that they are not covering separate events and reflect the same money.
So don’t be afraid that this is going to increase your tax obligation in any way, but be aware that you may need to be vigilant to ensure that this reported on your tax return in the right way. Even if this isn’t going into action until next year, I wanted to mention it now so that we can be ready to help you handle this in the right way.
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