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The New Payment App Tax Law: What Small Businesses Must Know

This year ushered in the start of a new tax law focused on third-party payment apps. The good news? It’s not a new tax. The bad news? Many more small businesses will be required to submit an extra form come tax time next year.

The $1.9 trillion American Rescue Plan, signed into law in March 2021, brought about more than just stimulus payments and small business relief. It also included a new law that drastically reduces the dollar threshold for reporting payments made via third-party payment network providers. The form applies to transactions made during the 2022 tax year, which means small businesses will begin including this form in their returns filed in 2023.

Fortunately, while this new law will impact a great many businesses, the size of the impact is minimal.

The New Payment App Tax Law

According to the new law, PayPal, Venmo, Cash App and other payment apps must send out a Form 1099-K, Payment Card, and Third Party Network transactions, to any business that receives $600 or more in payments through their networks, as well as to the IRS. (Note: Zelle is not included in this list, as it doesn’t actually settle funds itself.)

This is a considerable departure from the prior thresholds. That is, payment apps previously were only required to distribute Form 1099-K to businesses whose gross payments exceed $20,000 and recorded more than 200 transactions within the year. So, the new law drops the gross payments mark to just $600, and there is no minimum on the number of payments.

It’s important to note that businesses have always been required to report the income they record through third-party apps. The only change is that your payment provider is now being forced to report that information to you and the IRS, which means the IRS has another piece of information they can use to check against your returns.

And we’ll stress again: No new tax is being levied.

But if you’re a small business owner, do expect, if they haven’t already, that PayPal, Venmo and similar apps will ask you for a little more information (such as your Social Security number or Individual Taxpayer Identification Number) for compliance purposes.

What If My Friends and I Use Payment Apps?

One of the initial worries at the onset of this new law was that anyone who uses PayPal and similar apps would suddenly be forced to report payments from friends and family.

Not so.

For instance, if your brother sends you a Venmo payment to cover his portion of a restaurant bill, your aunt sends you a PayPal payment for your birthday or your roommate sends you his portion of the monthly utility bills, you don’t need to worry about reporting a thing. This is all nontaxable income that is excluded from your gross income.

McManamon & Co: Making Tax Time Easier

If you still need to get your small or mid-size business’s taxes in order, it’s not too late to reach out to the pros. McManamon & Co. is a full-service firm that provides a commonsense approach to accounting, tax and business consulting services. If you need help come tax time, we can do far more than filing — our tax services include minimizing your liabilities this year and plan to maximizing the tax code in your favor with a comprehensive plan each year after that.

McManamon & Co. is here for your tax, accounting and consulting needs. Call us at 440.892.8900 or contact us online today.

| Posted in small business taxes, taxes