Paws Off My Venmo
(Editor’s Note: On December 23, the Wall Street Journal originally reported, and other outlets did as well – that the IRS will delay enforcement of the new $600 reporting rule until Tax Year 2023)
You may have heard or read about in the news lately that the IRS has reminded businesses that they will need to report all digital payments sent to individuals/businesses in excess of $600. This rule came about as part of the American Rescue Plan Act of 2021 which changed the… changed? How did we get here? Let’s start at the beginning.
Way back in 2008, Congress included in the Housing Assistance Tax Act of 2008 a new requirement that payment processors who were intermediaries between a payor and a payee had to start reporting the payments received by payees to the IRS using a new tax form, the 1099-K. The intention behind including this in the Housing Assistance Tax Act was to try and catch the so-called basement eBay businesses that were making unreported income by forcing companies such as Paypal to report on them. Between 2008 and 2021, the requirements for reporting were: that you had to have at least 200 transactions and at least $20,000 in funds.
Seems reasonable, doesn’t? The hope was that those basement eBay sellers would now start reporting their income and expenses because those digital payments were now being reported to the IRS. Now, the way the law was worded caught more than just eBay sellers. It included credit cards too. At the time, I was working for a company that received credit cards on the behalf of retail customers (they used the credit card funds to purchase product). Those funds were applied to their outstanding balance owed for the products they purchased from the company – but because we were an intermediary between the main credit card processor and the end customer – we too had to submit a 1099-K. We got a 1099-K from the main credit card company and we in turn had to send a 1099-K to every customer we received credit card funds for. It was a paperwork nightmare which fortunately software was able to solve. But in terms of our customers, I really doubt any of them were not reporting their income to the IRS at the time. So in order to catch those so called eBay basement sellers, Congress cast a wide net that caught more than they intended. Fast forward to 2022 – as history has repeated itself.
Since the War Revenue Act of 1917, businesses have been required to report to the government whenever they paid an outside company or individual more than $6001 in a calendar year (I believe it started at $800 based on wikipedia) for labor or services – the so called non employee compensation. This was traditionally included on the 1099-NEC form, which was moved to the 1099-MISC from 1983 to 2019. As of the most recent versions of the form and reporting requirements, this was not intended for goods purchased from a company, only for labor and services. I can tell you from most accounting departments, this caveat is missed and by default they would send a 1099 unless you were exempted from reporting (basically if you are incorporated you don’t need to get a 1099, the assumption that all corporations are good tax citizens and file returns annually). This leads to the present day, and the Gig Economy
It seems that Congress wanted to make sure that the Gig Economy workers were reporting their income properly, and since there is a $600 per company/employer loophole in existing tax law for gig workers not having to have their payments reported on, they decided to expand the net of the 1099-K in 2021 to include anyone who receives digital payments in excess of $600 in a year, period.
Now, remember what I mentioned about labor/services rather than goods? Well, the 1099-K makes no distinction on it – it’s just a form with a box for each month, and they will tell the IRS how much money or equivalent (yes, even gift cards are taxable! Read section on gift certificates) they sent you every month. So it is up to you, the taxpayer, to keep records on what kind of items each of the digital payments are. If you earned it as extra income – you should report it as such. If it’s reimbursement or gifts from friends or family, you will need to keep track of it. Those are not taxable, but since I am not aware of a new line on the 1040 to exclude funds received for non-taxable purposes, this is where the real risk is. The IRS may decide to audit you if you received a substantial amount of funds on a 1099-K without reporting it as income. If it’s truly gifts and reimbursements, you don’t have much to worry about. But if you sold that $10,000 dollar, 15 year old couch for $650….the IRS may require you to prove the original price in order to avoid taxation on the $650. Because the selling of goods is considered a defacto business, even for garage sales. Normally the IRS doesn’t care because people aren’t usually making a profit from garage sales, and also they wouldn’t know about it unless you’re making over $10,000 in cash and deposit it at a bank like that, but now, if you accept Venmo, Cash app, Paypal etc for those items, the IRS will know about it.
This extended net was never the apparent intent of Congress when they added it to the American Rescue Act, as evidenced by recent calls from Congress to amend the rules – which probably won’t go into effect, even if passed, before the first wave of forms are reported early next year. To sum up: Is this a new tax? Technically no, but for the first time, many Americans are going to get a new tax form in the mail/email that could be taxable, but the IRS will not know what it’s for, so the real risk is if you don’t report it as income when it should be, the IRS could include your return in an audit sweep. Which, as someone who was audited once, is not a pleasant experience, even when you get a “you reported your taxes correctly” letter afterwards.