New tax rule may impact users of PayPal, Venmo apps
Business owners who use apps like Paypal, Venmo, and Square may be impacted by the expansion of a tax reporting rule that goes into effect January, according to CNN.
The new rule states that when a user utilizes the app to receive payments from various business transactions that amount to $600 or more annually, each of these transactions must be reported to the IRS by the app provider.
This means companies like PayPal, Venmo, and Square are responsible for reporting these business transactions to the federal government.
In order for the companies to do this, they may ask users to provide them with a social security number (SSN), Employer Identification Number (EIN), Individual Tax ID Number (ITIN), and/or to complete a 1099-K form.
For example, PayPal, which now owns Venmo, recently issued a Q&A to users of both apps, informing them that, "In the coming months, we may ask you to provide tax information like your Employer Identification Number (EIN), Individual Tax ID Number (ITIN) or Social Security Number (SSN), if you haven't provided it to us already."
Not every app provider issued statements similar to the one above as each company must decide how it will obtain the necessary tax information to be in compliance with the updated mandate.
This new adjustment to the tax reporting rule is the result of a provision in the American Rescue Plan and was designed to clamp down on unreported, taxable income.
It doesn't change any basic tax responsibilities, as income received for a good or service has always been reportable and, more often than not, taxable.
After the rule goes into effect, the only individuals who may worry about losing money are tax evaders who weren't reporting all of their business income in the first place.
So, to most small business owners, this mandate may mean completing a bit more paperwork than usual.
On that note, CNN cites Mark Luscombe, principal analyst for tax publisher Wolters Kluwer Tax & Accounting, as saying, "These third-party settlement entities may not know for sure if they are dealing with a business or an individual or if they are dealing with a payment for goods or services, or a non-taxable transaction."
"It is going to be up to the taxpayer, if they receive a 1099 in any form for a nontaxable event, such as splitting rent among roommates, splitting a dinner bill, or even selling something on eBay for less than you paid for it, to explain to the IRS that the 1099 was received for a non-taxable transaction."
Luscombe added that some may notice their business transactions have been reported in duplicate, and they will have to explain this to the IRS.
When that happens, it's up to the taxpayer to tell the IRS that the two 1099s are for the same transaction.
Essentially, to avoid hassles, some business owners may decide to keep their taxable and non-taxable transactions separate by asking associates to pay them in cash for smaller amounts and only use an app for taxable business transactions.
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