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IRS is requiring third-party payments apps to report transactions over $600

(BUSINESS) After a particularly hard year for small businesses, the IRS is cracking down once again. Business transactions over $600 must be reported.

IRS Tax paperwork representing preparing for taxes

Small businesses or freelancers that use third-party apps to receive (or make) payments should be aware of new IRS rules under the American Rescue Plan made in March 2021. PayPal, Venmo, and all Third-Party Settlement Organizations (TPSOs) are now required to send businesses a 1099-K if business transactions exceed $600 per year.

How this rule changes the reporting requirements

Previously, payment apps or TPSOs were only required to send the 1099-K form if transactions exceeded $20,000 or there were over 200 separate transactions within a calendar year. The new reporting requirements started on January 1, 2022, so it does not impact 2021 taxes, but small business owners, gig workers, online sellers, and independent contractors should be aware of the rules to be able to keep records associated with their business. Business owners should already report this income to the IRS, but this new rule is intended to create more transparency and visibility into money moving into accounts.

Rules to note under the new requirements 

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According to a PayPal press release this change is only for payments received for goods and services. It doesn’t include paying your friends and family. It also shouldn’t apply to selling personal property, provided that you sell the item at a loss. The reporting also won’t apply to amounts sent as reimbursement. However, businesses need to keep records to make sure their reports comply with IRS rules.

What kind of problems could ensue?

It should be noted that there isn’t an appeals process for what is being reported to the IRS. There’s no guarantee that Aunt Mary’s $2,000 loan won’t be reported as income. The IRS is watching more small businesses closer than ever. Here’s a more technical explanation from The Joint Committee on taxation. Talk to your tax pro about this new requirement if you’re concerned about how it will affect your business.

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Dawn Brotherton is a Sr. Staff Writer at The American Genius with an MFA in Creative Writing from the University of Central Oklahoma. She is an experienced business writer with over 10 years of experience in SEO and content creation. Since 2017, she has earned $60K+ in grant writing for a local community center, which assists disadvantaged adults in the area.

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