If you've been inspired by success stories like that of Kaitlin Kao, who earns up to $3,000 a month selling clothes on Poshmark, and you've dabbled in selling items online this year, you might have heard about a new "$600 tax rule." Social media posts, like this TikTok video that was published on September 26 and racked up 340,000 views, have claimed that starting January 2022, if you receive more than $600 per year through third-party peer-to-peer payment apps like Cash App, Venmo, or Zelle, you will be taxed on those transactions.
Those posts refer to a provision in the American Rescue Plan Act, which goes into effect on January 1, 2022, according to which anyone receiving $600 per year using Venmo, PayPal, Zelle, or Cash App will receive a 1099-K and be required to report that income on their taxes.
The new reporting requirement only applies to sellers of goods and services, not personal payments, like if someone paid you back for dinner.
"There's a little bit of confusion over this Venmo rule," says Steven Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center at the Urban Institute. The idea that any payment received over $600 will be automatically taxed as income is false, he explains. "These [1099-K forms] are just information reports. They don't themselves 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 estimates to be roughly $166 billion per year, not including the tax gap of large corporations. It's not a new tax and it does not suggest levying a new tax.
Here's what you need to know and how you should prepare for tax season in light of these new rules.
This new reporting requirement only applies if someone is buying or selling goods and services using a peer-to-peer payment platform, says certified public accountant Sheneya Wilson, the founder and CEO of Fola Financial. If you have a side hustle walking dogs, for example, and you're getting paid through Venmo, that is taxable income and will need to be reported to the IRS.
But let's say you sell a couch to someone online for $1,200. As long as you can prove with a receipt that you originally paid more than $1,200 for that couch, that is not considered taxable income, Wilson says.
Depending on how much you're earning, you may want to consult a tax professional. And even if you have the help of a professional accountant, you'll want to take these three steps on your own, Wilson says.
- Print a transaction report
A lot of peer-to-peer payment platforms allow the user to print transaction reports. Download your transactions for the year.
- Distinguish your transactions
Once you've downloaded your transactions, determine which ones were business transactions and which were personal. "I have our clients printing their reports so we can format an Excel sheet and they can denote, 'Here's revenue, here's what came from my aunt, here's what came from my sister,'" Wilson says.
- Gather your supporting documentation
Gather your invoices and receipts as supporting documentation to show which transactions were income and which weren't.
If money was received as a gift, you may need to explain the relationship between you and the person who gave you the present. The annual gift-tax exclusion for 2021 is $15,000 per donor, per recipient, meaning you don't need to pay taxes on a gift given that equaled $15,000 or less. If you're the recipient, you're typically not subject to gift tax.
It's important to note that just showing the IRS a bank or credit card statement doesn't qualify as a receipt. Wilson suggests creating an email account designated for receiving e-receipts to keep your transactions organized.
Receiving a 1099-K and reporting income from payments received on a peer-to-peer payment system isn't new: The tax reporting requirement started on 2012, though the threshold then was higher. A seller would only need to report income to the IRS if they had received $20,000 worth of payments per year and there were at least 200 transactions on their account.
Starting in January, "the threshold is being reduced dramatically, from $20,000 to $600, with no minimum number of transactions," Rosenthal says.
This updated reporting requirement is being confused with a separate proposal from the Biden Administration as part of a $3.5 trillion spending bill that is currently being debated by the House Ways and Means Committee. Under the proposal, the IRS would review every bank account with a balance above $600 or with more than $600 worth of transactions in a year.
This proposal in addition to the new 1099-K reporting requirements will probably make tax filing season more time consuming. "I'm just praying that this tax season isn't going to be as confusing as last year, but I think it is. A lot of us accountants are preparing," says Wilson. "This is going to be audit work without the audit."
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