A new era is beginning for internet merchants and anyone who receives payments from third-party payment processors.
All third-party payment processors operating in the US must begin disclosing payments for products and services valued at more than $600 per year on January 1, 2022. This implies that you will receive a 1099-K Money Card and Third-Party Network Transactions Form and that your income will be reported to the Internal Revenue Service if you conducted business and received payment using Venmo, PayPal, Cash App, Square, Stripe, Etsy, or eBay (IRS).
This new regulation, which was concealed in the American Rescue Plan Act of 2021, especially impacts entrepreneurs with side businesses, independent contractors, and gig workers. Historically, businesses were only required to send an IRS Form 1099-K if there were 200 or more transactions within a fiscal year and the gross payments exceeded $20,000. This has a significant impact on the terrain.
Only vendors of products or services who made money under the new law are subject to it. Even people who occasionally decide to clean out their closets and sell their clothing on eBay will now receive a 1099-K if the proceeds surpass $600 in a calendar year. However, the new regulation DOES NOT APPLY to transactions made between friends and family members, such as when you give a pal $20 via Venmo to split the cost of a pizza.
The Tax Implications
Businesses are already required by the IRS to report any revenue above $600 that is paid to independent contractors or gig workers. Previously, this was carried out via the Form 1099-MISC. This new rule extends that obligation to the digital firms who control the payment processors (like Venmo and PayPal) that the gig worker uses to receive paid via the app.
People who use payment services will probably need to retain more records as a result of this shift, especially if they also use applications like Venmo and PayPal for personal transactions (such as those involving friends and family).
Additionally, be conscious of the audit risk posed by the new reporting requirements. There will be audits opened pertaining to these reported tax transactions if the U.S. Treasury makes significant reporting changes, such as this one or those involving cryptocurrencies. Additionally, a lot of these transaction platforms now handle transactions involving the purchasing, selling, transferring, and keeping of cryptocurrencies, opening up a new route. If you refuse, the IRS may summon the records and require all information related to these accounts during an audit.
The Tech Industry Response
The internet companies who run the transaction sites and payment apps are not pleased with this new regulation. They are mobilizing in opposition to the idea of gathering tax ID numbers from millions of clients and the idea of acting as enforcers against those who don’t comply. Given the prevalence of cyber data breaches, the concept of these businesses collecting tax ID numbers—which are most likely Social Security Numbers (SSNs) for individuals—is unsettling.
The Coalition for 1099-K Fairness was established by Etsy, eBay, and five other corporations to oppose these new regulations and to band together to shield small businesses and online vendors from onerous tax and privacy requirements that they were not previously required to bear.
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