The Internal Revenue Service, the federal agency in the United States in charge of tax collection, will now directly look into the digital payment service accounts of American small businesses.
This policy change will primarily affect business owners who use third-party payment network providers.
Under the new rule, payments of $600 or more made through third-party payment networks must now be reported to the IRS.
“The change broadens the scope of reporting such that all TPSOs need to collect tax information once you near or reach $600 in goods and services transactions instead of the prior threshold of $20,000 and 200 transactions,” PayPal said in a blog post.
“This change impacts every financial institution and TPSO that you might use to transact for goods and services, not just PayPal and Venmo. This includes your bank accounts and other ways you send and receive money.”
The move is aimed at cracking down on payments made through third-party apps like Venmo, Cash App, Zelle, or Paypal and ensuring that those who use the third-party payment networks pay their fair share of taxes.
The new tax reporting requirement will apply to tax returns filed in 2022, as well as those filed in 2023.
Beginning Jan. 1, 2022, third-party payment networks are required to send users Form 1099-K for transactions made by mail or electronically.
What is a Form 1099-K?
The IRS Form 1099-K is an informational tax form used to report payments made to a business or individual to sell goods and services via a third-party network, also known as a Third-Party Settlement Organizations (TPSO) or credit/debit card transaction.
The IRS requires TPSOs to issue a Form 1099-K detailing the total payments received during the fiscal year.
For more information, visit the IRS website here.
1099-K threshold change
According to a PayPal blog, the new threshold change currently only applies to payments received for goods and services transactions and does not apply to pay your family or friends back via PayPal or Venmo for dinner, gifts, shared trips, and so on.
This change was made as part of the American Rescue Plan Act of 2021, which amended certain sections of the Internal Revenue Code to require TPSOs like PayPal and Venmo to report goods and services transactions made by customers with annual gross sales of $600 or more on 1099-K forms.
Currently, a 1099-K is only required when a user receives more than $20,000 in goods and services transactions in a calendar year and more than 200 goods and services transactions.
Currently, the in-flow and out-flow reporting changes are only a legislative proposal that Congress could consider this year.
All banks and payment service providers, including PayPal and Venmo, would eventually be required to report total inflows and outflows for accounts with at least $10,000 in total deposits and withdrawals to the IRS under the proposed change.