Earning Money Through PayPal or Venmo? You May Owe the IRS Money Next Year

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This story is part of Taxes 2022, CNET’s coverage of the best tax software and everything else you need to get your return filed quickly, accurately and on-time.

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If you have a side hustle, freelance or are self-employed, it’s never too early to get a jumpstart on your taxes. While you should pay estimated taxes throughout the year to avoid penalties, it’s also a smart idea to keep records of payments you’ve received throughout the year. 

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And if you get paid through digital apps like PayPal, Cash App, Zelle or Venmo, there’s a new tax reporting law that could impact your tax return. This new regulation, a provision of the 2021 American Rescue Plan, now requires digital payment apps to report an individual’s earnings over $600 to the IRS.

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What does this mean for you if you’re frequently paid via PayPal, Venmo or another third-party processing app? We’ll walk you through what’s changed and debunk a few myths along the way.

First, this isn’t a tax change, it’s a reporting change

If you’re self-employed, you should already be paying taxes on your total income, regardless of how you receive your payments for goods and services. The new legislation is not a tax change: It’s a tax reporting change so the IRS can keep tabs on transactions made through payment apps that often go unreported. 

Prior to this legislation, third-party payment platforms would only report to the tax agency 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. 

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The IRS will also receive a copy of the tax form and won’t be relying purely on self-reporting. “The IRS will be able to cross-reference both our report and yours,” PayPal noted in a statement in November.

To make managing your business finances easier, we recommend creating separate PayPal, Zelle, Cash App or Venmo accounts for your professional transactions.

Payment apps may request tax information from you

Now that this new law is in effect, payment apps like PayPal may reach out to you to confirm tax information, such as your employer identification number, individual tax identification number or Social Security number. If you own a business, you most likely have an EIN, but if you’re a sole proprietor or individual freelance or gig worker, you’ll provide an ITIN or SSN. 

Is the IRS taxing money you send to family and friends?

Rumors have circulated that the IRS was cracking down on money sent through third-party payment apps to family and friends, but that isn’t true. Personal transactions involving gifts, favors or reimbursements are not considered taxable. Some examples of nontaxable transactions include: 

  • Money received from a family member as a holiday or birthday gift
  • Money received from a friend covering their portion of a restaurant bill
  • Money received from your roommate or partner for their share of the rent and utilities

Will items sold on Facebook Marketplace be taxed?

If you sell personal items for less than you paid for them and collect the money via third-party payment apps, this new legislation won’t affect you. For example, if you buy a couch for your home for $500 and later sell it on Facebook Marketplace for $200, you won’t owe taxes on the sale. That’s because it’s a personal item you’ve sold at a loss. However, you may be required to show documentation of the original purchase to prove that you sold the item at a loss.

But, if you have a side hustle where you buy items and resell them for a profit via PayPal or another digital payment app, then earnings over $600 will be considered taxable and reported to the IRS. 

Make sure to keep a good record of your purchases and online transactions to avoid paying taxes on any nontaxable income — and when in doubt, contact a tax professional for help.

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