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Be Aware of These New Reporting Requirements for Payment Apps.

The use of payment apps like Venmo, Cash App and Zelle has become so common that Venmo is now a verb — as in, “I’ll just Venmo you the money.” Their popularity only grew during the pandemic as some people tried to avoid as much personal interaction with others as possible.

But thanks to federal legislation that was passed last year, you might be getting an IRS form in the mail early next year from third-party payment networks if you use these apps.

The American Rescue Plan, which was signed into law in March of 2021, includes a little-noticed provision requiring third-party payment networks to send IRS Form 1099-K, Payment Card and Third-Party Network Transactions, to anyone who received at least $600 in payments for goods and services using their app, with no minimum transaction.

Legislation Increases Reporting Thresholds

Before this legislation, reporting via Form 1099-K was only required if a user received gross payments exceeding $20,000 and was involved in more than 200 transactions during the year. The reporting requirement begins on January 1, 2022, and will apply to transactions that occur this year.

If your payment app transactions exceed these thresholds, you should receive Form 1099-K from the third-party payment network no later than January 31, 2023. You will then use the form as you prepare your 2022 tax return next spring.

Not all payment networks are subject to the requirement. According to the legislation, only third-party payment networks that handle settlement of funds have to send out Forms 1099-K to users whose transactions exceed these thresholds. These are networks that actually transfer funds between buyers and sellers.

In a statement, the network operator of Zelle stated that Zelle does not settle funds, but instead just provides messaging between a financial institution and users who make payments using the app. Therefore, Zelle is not subject to the requirement, according to their statement.

To help them report transactions properly, you may receive a request from third-party payment networks soon for additional information, such as your Social Security number, Individual Tax Identification Number or Employer Identification Number.

When you receive Form 1099-K early next year, it will report the total gross income you received via the app in 2022 (without adjustments, discounts or refunds). This will include online payments and payments you receive from credit cards. If any income reported on the form is business income, you must report this on your federal income tax return.

Tax Law Remains the Same

It’s important to note that while the legislation creates a new tax reporting requirement, it doesn’t change existing tax law. Form 1099-K is simply an informational tax form, and it may include amounts that are excluded from your gross income for tax purposes.

If the form reports money you received from a nontaxable source, you do not have to report this as taxable income. This includes money you received from a friend to pay for your share of dinner at a restaurant, money you received from a roommate to pay for his or her portion of the rent, and money you received as a gift from a family member.

As for funds you received from selling items or merchandise, you don’t have to report this money if the item was sold at a loss. If you sold the items for a profit, however, you must report this as business income on your tax return.

Good Recordkeeping is Essential

This new payment app reporting requirement will make good recordkeeping essential going forward since Form 1099-K may include both taxable and nontaxable income.

If you run a business, you should consider setting up separate third-party payment accounts for business and personal transactions so you can keep them separate. This might be especially helpful if your tax return is audited by the IRS.

Be sure to consult a tax advisor for specific guidance in your situation.

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