Articles & Alerts

Update as of December 2022: The IRS clarified in a notice that it will treat 2022 as a transition year to implement the lowered $600 reporting threshold and will now apply the 1099-K requirement starting in 2023 to help ensure that 1099-Ks are only issued to those taxpayers who should receive them. 

As of January 1, 2022, the use of third-party payment networks, such as Venmo, Cash App, or Zelle, for transactions amounting to more than $600 per year in exchange for goods or services will now have tax implications that must be reported as income on Tax form 1099-K. This is a law change announced as part of the American Rescue Plan.

The IRS has recognized that payments to business owners or service providers through third-party payment platforms are becoming more common. While the reporting requirements are not entirely new, the threshold has been dramatically lowered, as previously only those who received over $20,000 and had over 200 transactions per year on these payment platforms had to file with the IRS.

In accordance with this law change, third-party payment platforms like Venmo, Cash App, or Zelle will have to send impacted users Tax Form 1099-K. These users must report all payments received over $600 for goods and services on their 2022 tax return, filed in 2023. It’s important to note that the law did not change who is required to report income on Form 1099s, as it still only applies to payments made for a trade or business and does not include personal payments made.

While each platform may enforce this differently, Venmo has indicated that users will be asked to provide their tax information (ITIN, SSN, or EIN), and if they approach the reporting threshold required by their state of residence without confirming such information, their account will be placed on hold until it is provided. As the reporting requirements are only for transactions that are deemed goods and services, the filing requirements do not apply for transactions such as splitting the bill or paying back a family member. Customers can indicate whether a payment is for a good or service, which for Venmo is done through a button on the payment note screen in the app. Venmo also indicated that accurately classifying transactions for goods and services makes the marketplace safer by triggering eligibility for the platform’s Purchase Protection Program.

Zelle, which does not hold accounts or handle settlement of funds, has indicated that its network will not provide tax forms to users who trigger tax implications, and that the responsibility is that of the platform users to report their income to the IRS. It is imperative that anyone using third party payment networks to offer goods or services understand the intricacies specific to their platform of choice.

Many types of businesses and service providers receive payments through third-party payment platforms and many customers now prefer or request this option. However, with the dramatic decrease of the filing threshold, there may be providers that did not previously report transactions to the IRS that must now do so.

Some common use cases for transactions of goods and services through third party payment networks are:

• Landlords receiving rent payments from their tenants
• Child care services
• Cleaning, maintenance and janitorial services
• Landscaping and Horticultural Services
• Membership Organizations
• Salons or independent beauty service providers who receive payment and/or tips through payment platforms
• Legal Services and Attorneys (like independent practitioners)
• General (residential or commercial) Contractors
• Independent Management, Consulting, and Public Relations Services

What is Form 1099-K and what types of income are reported on it?

1099-K is a tax form that declares both taxable and nontaxable sources of income. Some examples of taxable sources of income are traditional wages, rent paid on a property you own, tips for services rendered, and income brought in during retirement. Some non-taxable sources of income that you will not need to report on your tax return include money received as a reimbursement (like a payment for splitting the bill for a dinner), money received from a roommate to pay part of a shared rent, or money received as a gift.

This stipulation is not a new tax, but more of a reminder that it is important to properly track and report income to the IRS. A best practice for anyone who receives payments for business matters through third-party platform apps like Venmo, Cash App, or Zelle is to set up two separate accounts – one for business and one for personal use. If you have any questions about how this will impact you, please contact your Anchin Relationship Partner or Jared Feldman, Leader of Anchin Private Client, at [email protected].