There is a lot of misinformation about the new IRS cash app rules. Many users are concerned that transactions made on apps such as PayPal, Zelle or Cash App will be subject to tax.
Social media posts such as this one from September 15 claim that beginning January 2022, if your annual income is more than $600 through third-party peer to peer payment apps like Cash App or Venmo, you will be subject to taxation on these transactions.
These posts refer to a provision of the American Rescue Plan ActThis law, which took effect January 1, 2022, provides that anyone who receives $600 per year via Venmo, PayPal or Zelle or Cash App will be entitled to a 1099-KThey are required to report this income on their taxes.
The new reporting requirements only apply to sellers of goods or services. They do not apply to personal payments such as if someone paid you back for dinner.
It doesn’t apply for taxes you are filing this year. It applies to your 2022 tax returns, which you will file in the spring 2023.
More from Grow
I made $30,000 at my first job and now earn over $200K a year
‘A cool destination to start over’: Millennials are flocking to Portugal
Suze Orman: 3 investing mistakes that can make you a ‘financial fool’
Steven Rosenthal, senior fellow at Urban-Brookings Tax Policy Center of the Urban Institute, says that there is some confusion about the Venmo rule. He refutes the notion that any payment received in excess of $600 will automatically be subject to income tax. “These [1099-K forms]These reports are merely information. They don’t determine tax liability.
The reporting requirement is an effort to reduce the country’s annual tax gap — the difference between taxes owed and taxes paid — which the IRS estimatesThe annual tax bill for large corporations is $166 billion. It is not a new tax, and it does not suggest that a new tax be imposed.
Here are the new rules and what you should know.
This new reporting requirement applies only to the purchase or sale of goods and services via a peer-to–peer payment platform. Certified public accountants advise that this is not applicable to other transactions. Sheneya Wilson, the founder and CEO of Fola Financial. If you have a side hustleFor example, you could walk dogs and get paid via Venmo taxable incomeYou will need to report them to the IRS.
Let’s say that you sell a couch online to someone for $1,200. Wilson states that as long as you can show with a receipt that the couch was purchased originally for more than $1,200, it is not considered taxable income.
She says that if you go out for dinner with a friend and send them half of the bill via a cash transfer application, it is not taxable.
A tax professional may be a good idea if you earn money from these apps. Wilson suggests that even if a professional accountant is available, you can still do these three steps yourself.
- Print a transaction log
Many peer-to–peer payment platforms allow users to print transaction reports. Download your transactions for the entire year.
- Differentiate your transactions
Once you have downloaded your transactions, identify which transactions were business transactions and which ones were personal. Wilson says that clients should print their reports and then we can create an Excel sheet so they can indicate, “Here’s revenue. Here are my aunt’s earnings. Here are my sister’s earnings.”
- Gather all supporting documentation
To prove which transactions were income, gather receipts and invoices.
If money was presented to you as a present, you might need to explain your relationship with the person who gave it. The annual gift-tax exclusion for 2021$15,000 per recipient and $15,000 per donor. This means that you don’t have to pay taxes on gifts less than $15,000 You are not subject to gift taxes if you are the recipient.
It is important to remember that a bank statement or credit card statement does not qualify as a receipt. Wilson suggests creating an email address to receive e-receipts. This will help you keep your transactions organized.
It is not uncommon to receive a 1099K and report income from payments received via a peer–to-peer system. tax reportingAlthough the threshold was higher in 2012, the requirement was implemented. A seller would only have to report income to IRS if they received at least 200 transactions and $20,000 in payments per year.
Rosenthal explains that in January, the threshold will be lowered from $20,000 down to $600 with no minimum number transactions.
Keep in mind that the IRS only cares about your profit, says Howard Samuels, a certified public accountant at Samuels & Associates. You can deduct any costs related to running your business and help offset your tax burden.
He explains that if you are cutting hair on the side and make $1,000, and have paid for hair products and scissors, you can deduct those items from your $1,000. You may be able to deduct your home office expenses if you did advertising.
The article “Is the IRS Taxing PayPal, Venmo, Zelle, or Cash App Transactions? Here’s What You Need to Know″ was originally published on Grow (CNBC + Acorns).