If you’re a solopreneur or a small business owner using third-party apps to process payments such as Paypal and Venmo you’ll want to be aware of a new tax reporting law that may impact your tax return next year.
This new regulation, part of the 2021 American Rescue Plan, requires earnings over $600 paid through digital apps to be reported to the IRS. Previously, third-party platforms would only report to the IRS if a user had more than 200 commercial transactions and made more than $20,000 in payments over the course of a year.
Going forward, third-party payment companies will issue you a 1099-K tax form each year if you earn $600 or more annually in income for goods or services. This tax form might include taxable and nontaxable transactions, particularly if the account is for both business and personal use.
The IRS will receive a copy of the tax form from the third-party app companies, therefore, will not be relying solely on the individual’s self-reporting.
It is recommended that business owners ensure they have separate business accounts set up through the payment apps for their professional transactions. Owners may also connect their accounting software to their payment apps to help track details.