Last Updated: January 18, 2022
The new tax changes that will come into effect starting January 1st may affect many users of digital payment apps. CNN reports that the changes will apply to those who use PayPal, Venmo, Square, or other third-party electronic payment networks.
Business owners will be the ones affected by this abrupt change. Companies like PayPal, Venmo, and Square will now have to report to the IRS any business transactions that are higher than $600, annually. In the past, only transactions above $20,000 were reported to the IRS. However, the new tax code change doesn’t mean that the primary tax responsibilities will change. All businesses, big or small, will need to report the income they receive for their services, as was always the case. Also, the change only applies to business transactions. So, in situations where users of PayPal, Venmo, Square, or other such digital payment apps, simply want to transfer money to a friend or relative, it will remain nontaxable.
What May Be the Indirect Consequences for the Affected Parties?
The said companies will serve as a link between the business owner and the IRS. But the same companies may not be aware when dealing with a business or an individual, whether the transaction they are dealing with is taxable or nontaxable. Even for nontaxable transactions, the digital payment company will simply send a 1099 Form to IRS. The taxpayer will have to explain to the IRS that such a form was sent for a nontaxable transaction (e.g. splitting a bill, selling goods on eBay for far less than you paid for, etc.).
Another thing to keep in mind according to Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting, is that your business transactions could be reported in duplicate – once by the client and once by the third-party payment platform. The taxpayer, once again, will have to explain to the IRS that the forms refer to the same transaction. Those less experienced in dealing with taxes may turn for help to tax software, from TurboTax to many other great alternatives.
What Are the Next Steps?
Before the rule goes into effect, the app providers may carry out certain procedures, from informing their customers about the change to adding a notice for their users regarding necessary tax information. Some providers, such as PayPal and Venmo, already started informing their clients. PayPal has a Q&A page that warns the clients that in the upcoming months they will ask them to provide “tax information like your Employer Identification Number (EIN), Individual Tax ID Number (ITIN) or Social Security Number (SSN).”
Although this abrupt tax change is aimed at tax evaders and claims not to affect those who had always reported their business transactions, both will have to deal with much more paperwork and watch out for duplicated reports on their transactions.