Saturday, Apr 01, 2023

Tax day: Venmo and PayPal users face more paperwork under new US rules

Tax day: Venmo and PayPal users face more paperwork under new US rules

Americans paid through digital payment service required to notify IRS of payments amounting to more than $600 a year, down from $20,000
It’s tax day in the US, the deadline for most individuals to file and pay tax owed. But while this year’s tax season may be closing for millions of Americans who are paid through a digital payment service such as PayPal, Venmo, Zelle and Cash App, the next tax year could come with even more complications.

Under a new law buried in the American Rescue Plan Act of 2021, digital payment services, or Third-Party Settlement Organizations (TPSOs), will now be required to notify federal tax collectors of payments amounting to more than $600 in total during the course of the year.

Before the change, taxpayers received a notification – known as a 1099-K – only if they processed more than 200 business transactions amounting to more than $20,000 over a year.

Now, with the payment threshold reduced to $600, US taxpayers who have never seen a 1099-K will be receiving one. No one knows how many Americans will be getting these forms, but tax lobbyists estimate the number at as high as 20 million.

According to small business consultant Gene Marks, writing in the Guardian earlier this year, “the reality is there are 30 million small businesses, freelancers, solo-preneurs and independent contractors in the US … who receive a number of small payments from many customers throughout the year may, well, forget”.

For individuals whose record keeping is sub-par, says Marks: “No worries! The IRS will now be able to find out what you earned anyway.”

Venmo says it will send out 1099-K forms to business profile owners after January next year to anyone who receives payments for the sale of goods or services through the service.

The threshold varies with the owner’s state of residence. For most states, the threshold is $20,000 in gross payment volume from sales of goods or services in a single year, and 200 payments for goods and services in the same year.

For residents of Massachusetts, Maryland, Vermont, and Virginia, the threshold is $600, irrespective of the number of transactions. For Illinois residents, the threshold is $1,000 with three or more transactions.

Further, individual taxpayers who have sold cryptocurrency on Venmo will receive a gains and losses statement.

If that induces record-keeping anxiety, the IRS would like you to know that the data collected will only be used for “taxpayer education and outreach products and services”, as well as “new examination and collection approaches”.

“For the 2022 tax year, you should consider the amounts shown on your 1099-K when calculating gross receipts for your income tax return,” PayPal warns. “The IRS will be able to cross-reference both our report and yours.”

The changes come as the IRS is facing its biggest backlog in history. At the end of the 2021 filing season, the agency had 35.3m returns waiting for processing, but with no more staff than it had in 1970, a reduced budget of 15% in real terms, and a considerably more complex tax code.

Over the past two years, the agency has suffered the largest data breach in its history, with famous taxpayers’ personal financial information leaked to news website ProPublica.

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