How Your Venmo or Etsy Payments Could Impact Your Taxes
A change to the tax code, set to take effect with the 2022 tax year, was designed to make sure that people who receive earnings via Venmo, Etsy or other third-party payment and credit systems accurately report their income to the Internal Revenue Service when filing their tax returns.
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Under the rethought rules, the idea was the government would recoup the $7 trillion believed to be owed that wasn’t being collected, according to The New York Times, by requiring the payment systems to report to the government funds totaling more than $600 that flow through an individual’s account.
But at the last minute, the IRS agreed to delay the new paperwork requirement, citing “taxpayer confusion, lack of clear guidance … and impact on the upcoming filing season,” the agency said.
That doesn’t mean you’re off the hook for reporting earnings paid electronically through third-party networks when you file your 2022 taxes. What it does mean is you now have a chance to familiarize yourself with the new rule and prepare to file your 2023 taxes with confidence.
What Is Form 1099-K?
An IRS 1099 form is used to report the ways people make money, other than from traditional jobs. The agency has a variety of 1099 forms, and one of them is the 1099-K.
Currently, if you receive more than $20,000 via at least 200 individual transactions through credit card or third-party payments, you’ll receive a 1099-K form. That will change for the 2023 tax year when the payments total at least $600 on any number of transactions. (According to TurboTax, there is no minimum threshold for debit/credit card transactions.)
This will impact you, for instance, if you sell homemade goods via Etsy. If your buyers order seven pieces of your art for $100 each, for example, Etsy will issue you a 1099-K form.
Note that some states currently have their own rules that require receipt of a 1099-K if gross sales reach certain levels. The minimum in some of those locales already is $600, so this federal form change won’t faze some sellers when it takes effect next filing season.
Other types of 1099 forms include the 1099-DIV if you’re received dividends or other investment payments; the 1099-G for government payments, including unemployment and state or local tax refunds; and the 1099-NEC for freelance workers.
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How Does Venmo Fit Into This?
Venmo has become the go-to for millions of people who want to easily send money to friends and family or to pay for services. For example, in just a few days, you might receive money for your birthday from your sister, pay the dog groomer or babysitter, reimburse your friend for your share of a group wedding gift, get paid by someone who bought the old coffee table you no longer want or bill a bride $150 for making her wedding veil. All by using Venmo.
You’ll notice there is a mix of personal and business transactions. And now that you’re on the 1099-K clock, you’re going to need to keep very good records of the money that goes in and out of your Venmo account. Venmo transactions aren’t the only ones subject to the law. Doing business with PayPal, Stripe and Upwork, for instance, also triggers the reporting mechanism.
What To Do Now
The IRS doesn’t expect you to pay taxes on the $25 your sister sends for your birthday, but accurate record-keeping is crucial. Now is the time to start separating those personal and business transactions. Both PayPal and Venmo allow you to have business and personal accounts, making it easy for you to differentiate your income for goods and services from the money your buddy reimburses you after a night of bowling.
At the same time, it’s important to keep records that back up the money going in and out of your third-party accounts. Whether you use bookkeeping software or the old paper file method, you’ll need to document what the money was received for through copies of invoices you issue.
When you pay the janitorial service for cleaning the office after hours via Venmo, you’ll want to ask for an invoice to have for your records for a deduction. Don’t just send the money via Venmo or another third-party app without documentation.
The Bottom Line
If you accept credit/debit or third-party payments for your goods and services, the IRS always has expected you to report the income — even if it’s less than $600 — on your tax returns.
The new law that takes effect with 2023 earnings doesn’t change that. It does heighten your responsibility to keep good records about the money you take in. You’ll want to make sure you aren’t being taxed on that birthday or bowling money. Your tax advisor should be able to answer questions you have about the new 1099-K form.
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This article originally appeared on GOBankingRates.com: How Your Venmo or Etsy Payments Could Impact Your Taxes