IRS Tightens Rules for Digital Business Payments

For consumers who use services like PayPal, Venmo or Square to conduct business, next year’s tax season could be a lot more complicated.

As CNN reported on Wednesday (Nov. 10), these payment app providers will need to start reporting customers’ business transactions — that is, payments for goods or services — to the IRS if they add up to at least $600 per year.

It’s a big change from the old system, which only required payment apps to send the IRS a Form 1099-K for accounts with at least 200 business transactions within a year if they totaled at least $20,000 in gross payments.

This change only applies to business transactions. If someone goes out for dinner with friends and uses a credit card with the idea that the friends will send their share via Venmo, they won’t have to report that transaction to the IRS.

The new rule, part of the American Rescue Plan, is designed to give the IRS more visibility into business income transactions, whether they’ve been reported by the recipient or not.

As CNN notes, the change should be most concerning for people who weren’t reporting all of their business income. However, tax experts say the change could mean some administrative headaches for tax filers using payment apps, regardless of whether they’re making business transactions.

“These third-party settlement entities may not know for sure if they are dealing with a business or an individual or if they are dealing with a payment for goods or services, or a non-taxable transaction,” Mark Luscombe, principal analyst for tax publisher Wolters Kluwer Tax & Accounting, told CNN. “It is going to be up to the taxpayer, if they receive a 1099 in any form for a non-taxable event, such as splitting rent among roommates, splitting a dinner bill or even selling something on eBay for less than they paid for it, to explain to the IRS that the 1099 was received for a non-taxable transaction.”

Read more: IRS Tightens Oversight of Crypto Trades and Taxes

Earlier this year, the U.S. Treasury announced it would be keeping a closer eye on cryptocurrency, requiring all crypto-related business transactions of more than $10,000 to be reported to the IRS.

The Treasury said in its announcement that “cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly, including tax evasion.”