Earn money with Paypal or Cash App? The IRS could be tracking your transactions

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If you are self-employed or have a side hustle and receive payments through digital applications such as PayPal, Cash App or Venmo, any earnings over $600 will now need to be reported to the IRS. A provision of the 2021 US Bailout Plan, which took effect Jan. 1, directs third-party payment processors to report transactions received for goods or services totaling more than $600 per year to the IRS.

Prior to this legislation, a third-party payment platform would only report to the tax agency if a user had more than 200 business transactions and made more than $20,000 in payments over the course of a year.

This new law will not apply to your taxes 2021, which will you file this tax season. But it will apply to earnings you make throughout 2022, which you’ll report when you file in 2023.

There is a lot of talk online about this new tax filing requirement and if you earn money through a digital payment app, you may be confused about what is true and what is not. Let’s separate fact from fiction.

read more: Don’t Overlook These 13 Tax Deductions and Credits in 2022

Fact: This isn’t a tax change, it’s a reporting change

If you are self-employed, you should already be paying taxes on your total income, regardless of how you receive your payments for goods and services. The new legislation isn’t a tax change, it’s a tax reporting change so the IRS can monitor transactions made through payment apps that often go unreported.

In the future, third-party payment companies will issue you a 1099-K tax form each year if you earn $600 or more annually in income from goods or services. This tax form may include taxable and nontaxable transactions, especially if the account is for business and personal use.

The IRS will also receive a copy of the tax form and will not rely solely on self-reporting. “The IRS will be able to cross-reference both our report and yours,” PayPal said in a November 2021 statement.

To make managing your business finances easier, we recommend that you create separate PayPal, Zelle, Cash App, or Venmo accounts just for your professional finances.

read more: Estimated taxes for 2022: what they are, who must pay them and when they are due

Fiction: The IRS is counting the money you send to family and friends

Rumors have circulated that the IRS was cracking down on money sent via third-party payment apps to family and friends, but that’s not true. Personal transactions involving gifts, favors or reimbursements are not considered taxable. Some examples of nontaxable transactions include:

  • Money received from a family member as a holiday or birthday gift
  • Money received from a friend to cover your share of a restaurant bill
  • Money received from your roommate or partner for your share of rent and utilities

Fact: Payment apps may ask you for tax information

Now that this new law is in place, you may be contacted by payment applications like PayPal to confirm tax information, such as your employer identification number, individual tax identification number, or Social Security number. If you’re a business owner, you’ll most likely have an EIN, but if you’re a sole proprietor or self-employed person, you’ll provide an ITIN or social security number.

read more: Doing taxes on your phone? better read this first

Fiction: Personal items sold at a loss will be taxed

If you sell personal items for less than you paid for them and collect money through third party payment apps, this new legislation will not affect you. For example, if you buy a sofa for your home for $500 and then sell it on Facebook Marketplace for $200, you won’t owe sales tax. That’s because it’s a personal item that you’ve sold at a loss. However, you may need to show documentation of the original purchase to show that you sold the item at a loss.

However, if you have a side hustle where you buy items and resell them for a profit through PayPal or another digital payment application, profits over $600 will be considered taxable and will be reported to the IRS.

Be sure to keep good records of your online purchases and transactions to avoid paying taxes on any nontaxable income, and if in doubt, contact a tax professional for help.

read more: Best Tax Software for 2022: Comparison of TurboTax, H&R Block, Jackson Hewitt and others

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