What the New $600 Form 1099K Means for Zelle, Venmo & PayPal | USTaxAid

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What the New $600 Form 1099K Means for Zelle, Venmo & PayPal

Written by Diane Kennedy, CPA on January 8, 2022

The rules changed on January 1, 2022 if you receive electronic payments for any reason. It could be a bank transfer from one account to another bank using Zelle. It could be some money you send to your college-age daughter. Or it could be a purchase you make with PayPal.

You don’t have an issue, unless you’re the one who receive the payment using a third-party source like Zelle, Venmo or PayPal. If you receive a total of $600 or more during the year using one of those sources, or any third-party payer such as Etsy or eBay, you’re going to get a Form 1099-K.

The new law was part of the American Recovery Plan Act of 2021 (ARPA), signed into law in early 2021. Part of the law was that the IRS was supposed to write regulations for the reporting process. Earlier this year, they released proposed regulations about the reporting.

And, it’s as bad as most people feared.

Maybe even worse.

Before we jump into what this could mean for you, and what you can do about it to prepare, let’s talk about how the IRS works with Congress’s laws. I promise it won’t be too boring, but it does give some perspective. 

How a Law Turns Into Tax Procedure

When Congress passes a law that it has to do with taxes and the President signs it, , it’s up to the IRS to tell us HOW to implement the law.

They do this by giving us Regulations. That’s the “how” of what we need to do. Sometimes the IRS writes temporary regulations so we all have an idea of how it’s going to work. They wait to hear feedback from tax professionals who actually work with the temporary regulations and often modify them somewhat to create final regulations.

Occasionally, they first write proposed regulations. In this case, nothing is actually engraved in stone. It’s a way for the IRS to comply with the deadlines Congress sets but also gives time for feedback from the public.

That’s what has happened here. And the feedback and been pretty loud.

Problems with the $600 Form 1099-K Reporting

Prior to the law change with ARPA, 3rd party processors like PayPal, Stripe and merchant service providers were required to report sales that were over $20,000 and there were over 200 transactions. In the case of service providers that used processors like these, they often received both Form 1099-NEC (if not incorporated) from their business clients and Form 1099-Ks from the service providers.

On the surface it may look like doubling up on the income, but there rarely (if ever) was a problem with the IRS or state tax authorities thinking that businesses had underreported income. 

Congress decided to make a change. The concern is that there were individuals selling products or services and not reporting the income. So, they lowered the standard to just $600 per year and included bank transfer companies like Venmo and Zelle. 

And when the proposed regulations came out from the IRS recently, it suddenly has a lot of people concerned. 

The Challenge with the New Form 1099-K Rules

Let’s say you are an employee of a business who hasn’t set up direct deposit to pay their employees. They could write you a check, or like a lot of small businesses have done, they may just transfer the net pay via Zelle.

Employees receive Form W-2s so the income they receive is reported. But now they’re also going to have a Form 1099-K that shows they received a different amount (based net incomebefore). On the surface it could look like they had underreported income.

Or, let’s say you have bank accounts in several banks. You transfer money from an account at Bank A to your account at Bank B. It’s not taxable, they’re both your accounts. But now you’re going to get a Form 1099-K that shows you have underreported income when you file.

Maybe you send some money to a family member via PayPal to help out with an emergency. Suddenly, that is getting reported on a Form 1099-K and the IRS is expecting them to pay tax on it.

None of these circumstances should have meant another taxable event.  But if things don’t change in the process, you’re going to need to be prepared.

How to Prepare For the New Form 1099-K Rules

Begin tracking all bank transfers that could be subject to the Form 1099-K rules. If someone sends you money for any reason or you send money to yourself, make a note of it on the bank statement, an excel spreadsheet or in a journal.

If you make a few sales on Etsy, eBay or the like, turn that side hobby into a legitimate business so you pick up tax deductions. You’ll actually find yourself paying less tax as a result.

You really don’t want to be called a hobbyist in 2021. Check out THIS article.

https://www.ustaxaid.com/blog/why-you-dont-want-to-be-called-a-hobbyist-in-2021/

Stay tuned to this issue. It’ll be interesting to see how the IRS resolves this potential paperwork disaster.

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