Lawmakers weigh tax rule 'backslide' for Venmo, PayPal users, says analyst. What it means for you

0
156

As the year-end approaches, there’s been debate around tax reporting for business transactions on payment apps such as Venmo and PayPal, along with e-commerce companies, such as eBay, Etsy and Poshmark.

Some lawmakers are pushing to increase the IRS reporting threshold for Form 1099-K, which covers third-party business payments. Taxpayers who use a payment app to process transactions for a side hustle or small business, or who sell a product or service through an e-commerce site, will receive a Form 1099-K at tax time detailing that income if their transactions exceed the threshold.

The American Rescue Plan Act of 2021 dramatically reduced the threshold, and now lawmakers are looking to change course.

“There’s bipartisan interest in the backslide because of all the misinformation that’s out there,” said Steve Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center, who addressed the issue on CNBC’s “Squawk Box” last week.

More from Personal Finance:
These 3 steps can help you cover rising college costs
Rather than a recession, we could be in a ‘richcession’ instead
How to leverage 0% capital gains with lesser-known tax strategy

How the tax rule change affects payment app users

Before this year, you may have received Form 1099-K if you had more than 200 transactions worth an aggregate above $20,000. The tax rule change affects payment app users

Before this year, you may have received Form 1099-K if you had more than 200 transactions worth an aggregate of over $20,000. The threshold does not apply to personal transfers made through apps such as Venmo or PayPal, like sending money to a family member or friend. But experts have expressed concern that some taxpayers may now receive a 1099-K by mistake, creating headaches at tax time.

And given that just one transaction above $600 is enough to trigger the form, even someone who makes a one-off sale of, say, an old couch or hot concert tickets could find themselves with an extra tax document to contend with.

The lower 1099-K reporting thresholds have been controversial amid increased scrutiny of the IRS, particularly among online sellers, gig economy workers and others who worry about confusion and higher taxes.

There’s bipartisan support for the change

The lower Form 1099-K thresholds were originally slated for 2022. But the IRS delayed the rule in late December, to “help smooth the transition and ensure clarity” for taxpayers and professionals.

Now, with the tax season fast approaching, there’s a legislative push from both chambers to increase the 2023 reporting threshold.

The Republican-led House Ways and Means Committee in June approved legislation to revert the reporting thresholds back to 2022 levels. The Red Tape Reduction Act was introduced by Senators. Sherrod Brown (D-Ohio) and Bill Cassidy (R-La.) introduced a bill in May that aims to increase the threshold to $10,000. Rosenthal said that “

do not increase taxes.” They only help to determine taxes that are already due. “

Form 1099-K has ‘always been problematic'[Information returns]Meanwhile, there are lingering worries among tax professionals about the 1099-K change. In June, the American Institute of CPAs reiterated its support for increasing the reporting threshold in order to avoid “significant tax confusion”. “

In a June letter endorsing the Senate’s Red Tape Reduction Act, AICPA voiced concerns about an administrative burden for taxpayers and the IRS, especially if Forms 1099-K wrongly include personal transactions, such as gifts or reimbursements.

Form 1099-K has always been problematic.

Phyllis Jo Kubey

Immediate past president of the New York State Society of Enrolled Agents

“Form 1099-K has always been problematic,” said Phyllis Jo Kubey, a New York-based enrolled agent and immediate past president of the New York State Society of Enrolled Agents. Even in older versions with higher thresholds and more transactions, it often did not accurately reflect what was taxable income. Even if you don’t receive a Form 1099, business payments are still taxable. Experts say it’s a good time to get organized. “But if the IRS has a document that says ‘X,’ and you’re saying ‘Y’ on your tax return, it may provoke more scrutiny, which is another level of time, expense and aggravation that people don’t need,” Kubey said.

How to prepare for the 1099-K reporting change

Even if you don’t receive a Form 1099-K, business payments are still taxable, and experts say it’s a good time to start getting organized.

Regardless of the payment platform, it’s important to “be familiar with the systems,” know where to access payment information and to keep your account open, said Albert Campo, a certified public accountant and president of AJC Accounting Services in Manalapan, New Jersey.

“Our biggest piece of advice is to make sure you get the

information as soon as you have it available,” which may save time next filing season, he said.