Matter & Substance
  January 27, 2022

Mobile Money Apps Must Report $600+ in Business Transactions to IRS

Effective January 1, 2022, mobile money apps like Venmo, PayPal, and CashApp must report annual commercial transactions totaling $600 or more to the IRS.
This change comes as a part of the 2021 American Rescue Plan. Previously, the threshold for reporting commercial transactions for Third-Party Settlement Organizations (TPSOs) was much higher, and 1099-Ks were issued at $20,000.

Why did Congress change the threshold?

Self-employed workers in America are growing in number—the US Bureau of Labor Statistics reports a projected growth rate of 7.6%. With the pandemic has come a shift towards independent work and “side hustles,” which allow people to make money either in addition to their normal income or entirely without an employer.

This movement to self-employed work is particularly concentrated in the arts – musicians, singer, photographers, and writers – who do not often have the same career stability. By 2026, self-employed work in the arts is projected to be 25%. For all other occupations, self-employed work is projected at 6.2% of the workforce.

Congress is reacting to this shift to ensure the collection of taxes by the IRS against those who are underreporting their income. By lowering the threshold and requiring 1099-Ks to be issued for commercials transactions of $600, accountability will be pushed to providers such as Venmo and PayPal. This has prompted them to change or update their policies. Users now have to specify if transactions are business or personal.

Although it’s possible for self-employed workers to continue underreporting by switching back to cash transactions (which are hard for the IRS to track), digital transactions and online banking have become the norm. Additionally, self-employed workers are more likely selling their goods online than in person. With this change in the reporting of TPSO commercial transactions, the IRS expects they will be able to tax income that was previously underreported.

What transactions must be reported?

The change in the reporting threshold is currently only for payments received for goods and services transactions. If you are just using Venmo to pay your friend back for dinner or a shared trip, then that transaction should not be reported as it does not count towards your income.

PayPal clarifies further on their website:

"Form 1099-K is an IRS informational tax form that is used to report goods and services payments received by a business or individual in the calendar year. While banks and payment service providers, like PayPal and Venmo are required by the IRS to send customers a Form-1099K if they meet the $600 threshold amount, there are certain amounts that may be included on the form that are generally excluded from gross income and therefore are not subject to income tax. This includes:

Amounts from selling personal items at a loss

Amounts sent as reimbursement

Amounts sent as a gift

So, for example, if you purchased a couch for $1200 and sold it for $800, this amount would not be subject to income tax."

To stay organized, we recommend you include memos or notes within the transaction to identify the purpose of money received through a TPSO like Venmo or PayPal and keep receipts if the expenses are larger. Some apps already have a feature which marks transactions as personal or business.

Be wary of using these categories incorrectly—if you’re audited, you’ll have to be able to back up the way you categorized your transactions with receipts.

What if something is reported incorrectly?

If you believe the information on a Form 1099-K is incorrect, the form has been issued in error, or you have a question relating to the form, you’ll have to contact the filer. This would be the TPSO like Venmo or PayPal, whose name appears in the upper left corner on the front of the form. Or you may contact the payer, or PSE, whose name and phone number are shown in the lower left corner of the form.

If you contact the filer and still cannot get this form corrected, you may attach an explanation to your tax return and report your income correctly. Again, be sure to back up your reporting with receipts, dates, etc. If your income is different than the amount reported on you 1099-K, you will need to substantiate and prove your actual income if the IRS questions this.