The income tax season in the United States is approaching. The Internal Revenue Service (IRS) typically begins accepting returns in the last week of January, with the official announcement coming in the middle of the month.
For this season, as almost always, there are new developments. However, there is one change that deserves to be highlighted here as it may affect many people’s returns, especially small business owners and independent workers.
The American Rescue Plan Act (ARPA) of 2021 changed the reporting rules to the IRS for payments received through apps like PayPal, CashApp, and Venmo. The new rules require payment processing companies to send a Form 1099-K to all users who received $600 or more in payments for goods or services provided during the year.
This rule will take effect starting with the 2022 tax year, meaning the tax return you must submit starting at the end of January. However, the IRS recently announced that the year 2022 will be treated as a “transition year” for the implementation of the rules regarding Form 1099-K.
This means that payment processing companies may choose to follow the previous rules, which state that Form 1099-K should only be sent if a business or individual received more than $20,000 in payments in more than 200 transactions. The new $600 threshold will only take effect in the 2023 tax year.
Thus, if you received between $600 and $20,000 for goods or services provided through payment apps in 200 or fewer transactions, you may or may not receive a Form 1099-K.
But here is a very important piece of information: this transition policy applies only to the sending of Form 1099-K.
If you received payments for goods or services provided through the apps, you must report to the IRS all taxable income, regardless of whether you receive Form 1099-K or not.
A tax professional can help you determine which payments received are considered taxable. So, if you have questions regarding the new rules, be sure to consult an accountant before filing your income tax return this year.