The IRS is about to see your Venmo. Well, not exactly, but the reporting rules for network transactions have been expanded to capture almost all small business transactions. Beginning January 1, 2022, third-party payment networks such as Venmo, CashApp, Zelle and Paypal are required to send business users Form 1099-K for transactions that equal $600 or more in the aggregate. How well the networks distinguish business payments for sales of goods and services from personal and family payments remains to be seen.
The American Rescue Plan Act of 2021 decreased the reporting threshold for Form 1099-K from $20,000 in aggregate payments and 200 transactions to $600 in aggregate payments, with no minimum transaction requirement, effective 2022. The reporting is not required for transactions that do not involve payments for goods or services.
There is one pending change to these rules. The Build Back Better legislation provides a 2022 transition year reinstating the 200-transaction requirement before backup withholding is imposed on payees who fail to provide a taxpayer identification number (TIN). In general, backup withholding is required for payment transactions if the recipient fails to furnish a TIN, the TIN furnished is incorrect, or the payment recipient has underreported income to the IRS.
Business v. Personal Transactions
Only payments for goods or services in a business context are reportable. An individual who has registered for a mobile payment service and uses the service to reimburse friends or relatives for expenses, or on occasion sells a used item to another person, would not be engaging in reportable transactions.
One issue that arises is how the payment networks will distinguish between business and personal transactions. Most networks require customers to create a business profile or business-only account as part of their terms of service for recipients who receive payments for goods or services through the network. (See Venmo’s FAQs.) Except in limited circumstances, personal accounts may not be used to conduct business. If a network detects business activity on personal accounts, the payment recipient’s account could be canceled.
The IRS FAQs also explain that taxpayers who sell occasionally on internet auction sites or who have a holiday craft business are subject to the reporting rules and should be receiving a Form 1099-K for any payments taken through the networks.
If taxpayers do not voluntarily comply by identifying business activities, they could face stiff penalties for nonreporting or underreporting income.
What Information is Reported?
The name, address and TIN of each participating payee are included on the form along with the total amount of payments. The amount reported is the “gross amount” received for the calendar year—that is–the total unadjusted dollar amount of the payments to the recipient. The form also shows a month-by-month breakdown which is necessary to resolve differences between information returns and tax returns of fiscal year filers, according to the IRS.
It is important to understand that the amount reported is not adjusted to account for any fees, refunds, or returns. For that reason, it is important for businesses to keep meticulous records and receipts for refunds, returns, fees, etc., anything that can be subtracted from the gross amount to get to taxable income.
The 1099-K forms must be furnished to the payee by January 31 of the year following the transactions.
For small businesses and occasional sellers, the IRS is about to get much more information about the number of payments received through the popular payment networks. The amount reported generally is not the amount that will be taxed. Therefore, it is important that taxpayers keep detailed records, receipts, return and refund information, etc., to make sure they can justify the amount of income reported on their income tax returns versus the amount shown on their 1099-Ks. Finally, it is important not to comingle business and personal payments in the same account to avoid confusion and misreporting.