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New Venmo, PayPal, Cash App, and Zelle tax rules 'absolutely' mean more audits, CPA says

"Self-employed people, small businesses are audited significantly more than W2 employees."

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The IRS is cracking down on payments received through third party peer-to-peer cash apps like Venmo, PayPal, Zelle, or Cash App to ensure that anyone using them pays their fair share in taxes.

On January 1, a provision of the American Rescue Plan Act went into effect that requires payment services to report any transactions collectively worth $600 or more in a year to the tax agency.

If you're a small business owner, an independent contractor, or if you have a side hustle, and you accept payments through a third-party cash app, you can now expect to receive a 1099-K form where you'll be obligated to report such payments as income.

There is "absolutely" going to be an uptick in audits for small businesses, says Howard Samuels, a certified public accountant at Samuels & Associates in Florham Park, New Jersey. "Not only because of this rule, but I think there's going to be an uptick because of Covid-19."

Here's what you need to know and how you should prepare for tax season in light of these new rules.

Small-business owners on tax change: 'It's really freaking annoying'

Since millions lost their jobs during the pandemic, many became independent contractors, "and the government views that as running your own small business," Samuels says. "Generally speaking, self-employed people, small businesses are audited significantly more than W2 employees."

That's because their tax situations are less straightforward and require more proof of income and expenses, he says.

Small business owner Carly Orlansky is not happy about the new requirement. "It's really freaking annoying," says Orlansky, who is the founder of The Gifting CO NY, a personalized gifting company. "I haven't fully decided what I'm going to do about it."

The Gifting CO NY founder Carly Orlansky celebrates Hanukkah with her personalized menorahs with her children, Cole, Cooper, and her husband Justin.
Courtesy Carly Orlanksy

Before starting The Gifting CO NY in June, Orlansky manufactured textiles for clothing companies until the pandemic hit. "During the pandemic, I lost what my business was," she says. "All of those stores closed so they stopped buying all of the fabric, and they cancelled all of their orders."

Creating and selling personalized gifts like paint-splattered denim jackets, personalized menorahs, and makeup pouches "gives me the opportunity to work from home, be with my kids, and also do something I love," she says.

Orlansky's goods range in price from $20 to $80, and "90% of my payments come through Venmo," she says. "The rest come through Zelle."

Personalized gifts from The Gifting CO NY.
Courtesy Carly Orlansky

If she continues using Venmo to sell her goods, she'll have to set up a business profile and pay a transaction fee which is 1.9% + $0.10 of the payment. So, for example, if she made a $100 sale, she'd pay $2 in fees, leaving her with a profit of $98, according to Venmo.

"Platforms like Venmo should be free for us," Orlansky says. Otherwise she may have to raise her prices.

"I try to keep my prices very reasonable for people," she says. "I want my customers to come back and the pricing has a lot to do with that."

Put memos in your Venmo transactions

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 in 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.

Now, the threshold is being reduced from $20,000 to $6,000, with no minimum number of transactions.

The reporting requirement only applies to sellers of goods and services, not personal payments, like if someone paid you back for dinner.

To stay organized, when make digital transfers of cash, "make sure you put memos in Venmo as to what you're using it for, what's business and what's personal, and if it's business, you've got to have further back up, like receipts," Samuels says.

If you try to avoid paying taxes on income by having a customer write in the memo "dinner," for example, you're taking a risk, Samuels says. "If the IRS wanted to be a stickler about it, they could say, 'We still want the receipt and we'll look at your half.'"

"If that person ever got audited, the government would probably find that money anyway because the government is allowed to go look at Venmo and PayPal and everything else," Samuels says.

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