Third Party Payment Processing Apps to Start Reporting User Income to the IRS

(KNSI) — If you are one of the millions who use a third-party payment processor like PayPal, CashApp, or Venmo, you may soon have to pay taxes on some of those transactions.

Thanks to the $1.9 trillion American Rescue Plan Act, the IRS requires third-party payment processors to report accounts that receive payments for goods and services over $600 a year. Many people are afraid that if they receive cash as a gift, get rent payments from a tenant or roommate, or are reimbursed for money they already spent, they’ll have to pay taxes.

Not so, says accountant Sandy Flom, provided the users keep good records. “Keeps some kind of a log that says what you’re using the money for. If you’re using it to pay back siblings for purchases or one friend buys dinner and you use it to pay them back. Just kind of keep track of what it is and be aware of what you’re using it for.”

Have a system, experts say, and include accounting and payroll records, receipts, bank statements, tax forms, tax returns, and any other business-related financial documents via electronic or paper.

Mitchell Olson, with South Dakota-based The Fruit Truck, says the new rule will not suit him or his customers. He may ditch the third-party payment processors altogether, saying, “This is going to hinder us from wanting to do more business with Venmo. And we might try to find a different way to do our business. Or we might just do away with this Venmo app and maybe just go back to what we did before, which was just cash and checks.”

Experts say this is not a new tax; it simply changes tax reporting requirements rather than altering tax laws altogether.

For the 2021 tax year, apps will issue a Form 1099-K to business profile owners who have passed the IRS reporting threshold for the state where they live. The new IRS rule won’t affect 2021 returns, but experts say now is the time to get ready for next year when it will take effect.

The Zelle app says on its website, “Zelle® does not report transactions made on the Zelle Network® to the IRS. The law requiring certain payment networks to provide forms 1099K for information reporting does not apply to the Zelle Network®,” but, “If you have any tax questions about your individual situation, please consult a tax or legal professional.”

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