When the American Rescue Plan was signed into law, it brought major changes to the reporting requirements for third party settlement organizations (TPSOs) like Venmo, Paypal, and CashApp, drastically lowering the reporting threshold from $20,000 to $600. These updated reporting requirements were meant to take effect for tax year 2022, but in December, the IRS announced that the lower reporting thresholds would be delayed another year, leaving many taxpayers unsure about what they should report and what to do if they have already received a 1099-K.
Your clients will look to you to understand how their taxes could be impacted by their Venmo, Paypal, and other TPSO accounts. Here’s what you should know about to help them stay informed and compliant this tax season and beyond.
Why did the IRS delay the new 1099-K requirements?
With such a drastic change in reporting thresholds, TPSOs would be required to send significantly more 1099-Ks than they ever had in prior years. Acting IRS Commissioner Doug O’Donnell reported that both the IRS and the Treasury were concerned about the tight timeline for such a significant change. To give taxpayers, tax professionals, and TPSOs time to adjust and prepare, the IRS decided to wait until calendar year 2023 to enforce the new reporting requirements.
What should your clients do for the 2022 tax year?
It’s important that your clients know that the IRS is only delaying the TPSO’s obligation to send 1099-Ks to anyone with more than $600 in transactions. The delay does not mean that taxpayers can leave taxable income from TPSOs unreported.
Continue to report all income over $400
If your client has a small business or side hustle, hopefully they’ve kept their own detailed records of business income and expenses, including transactions that occur on Venmo, Paypal, or other TSPOs. If this is the case, they can report this accurately, even without a 1099-K from the TPSO. If they were counting on a 1099-K to keep records for them, they should comb through their transaction history to properly record and calculate any income-related transactions.
Don’t report personal transactions, even if they appear on a 1099-K
Since the IRS’s announcement of the delay came so late in 2022, it’s possible that your client still received a 1099-K for aggregate transactions over $600. If these transactions were income-related, they should be reported on their tax return. But in many cases, the transactions may have been personal, such as gifts, reimbursements from friends, or shared utility expenses from roommates. You can reassure your client that these transactions do not need to be reported as income, even if they received a 1099-K.
The IRS’s FAQs on Form 1099-K offers further clarification on determining whether a TPSO transaction should be considered taxable income or a personal transaction.
What should your clients do to prepare for the 2023 tax year?
The new 1099-K reporting requirements are already in effect as of January 2023. That means that next tax season, anyone with aggregate transactions over $600 in calendar year 2023 will receive a Form 1099-K, and the IRS will be cracking down on non-compliance related to TPSO income. To make sure your clients are prepared, advise them to take the following steps with their TPSO accounts:
Separate business and personal TPSO accounts
Anyone who uses TPSO accounts for business purposes should have separate accounts for business and personal uses. This will help them maintain accurate records and decrease the chance that personal transactions will appear on their 1099-K.
Start typing actual memos
It’s possible, even likely, that some personal transactions will end up on Form 1099-Ks when the new reporting requirements do kick in for 2023. Typing detailed memos –as opposed to the emojis that are popular on Venmo– will help you clients when tax season rolls around. They’ll be able to sort out any personal transactions, and if the IRS does ask questions about a discrepancy between their 1099-K and their reported income, you’ll have detailed records to support what you reported.
For refresher on how to report the information on a 1099-K on your client’s return, see our post, What Tax Pros Should Know about Updates to 1099-K Third Party Payments.