More taxpayers will receive tax forms from apps such as Venmo, PayPal for 2023. Here's how to avoid tax issues
- There's been lingering confusion about tax reporting for peer-to-peer payment apps such as Venmo and PayPal.
- Next tax season, more filers are expected to receive Form 1099-K, which reports third-party business payments to the IRS, because the income threshold drops down to $600.
- Taxpayers can be proactive by tracking transactions and planning for their expected tax bill.
Taxpayers who use peer-to-peer payment apps such as Venmo and PayPal and e-commerce companies such as eBay, Etsy and Poshmark may be receiving a tax form new to them next year — one that's worth some advance planning.
Starting this tax year, such companies must use a new, lower threshold when issuing tax forms to individuals who make business transactions through those platforms. The tax-year 2023 threshold is just $600 for even a single transfer, down from more than 200 transactions worth an aggregate above $20,000.
As a result of the change, more taxpayers are likely to receive Form 1099-K, which reports third-party business payments to the IRS.
The IRS delayed the controversial change, which was initially meant to go into effect for 2022 taxes. Some lawmakers are pushing to increase the reporting threshold, so it could change further.
However, regardless of the tax reporting threshold, it's important to remember P2P business payments have always been taxable, experts say. Here are some additional tips to consider before the reporting change in January.
Start saving for taxes or make payments
First, it's important to learn more about how the 1099-K reporting change may affect you, according to Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.
Lucas said the IRS' frequently asked questions page provides a good overview of possible scenarios taxpayers may encounter and how to report those payments on returns.
"It's just really understanding where income is coming from," he said.
Personal P2P payments between friends and family still won't be taxable, according to the IRS.
And if you're expecting to owe money, setting aside money or making quarterly estimated tax payments is "absolutely a smart thing to do," since you may not be withholding enough through your paycheck at work, Lucas explained.
Record-keeping is an 'absolute necessity'
If you're accepting business payments via P2P apps, it's critical to put a bookkeeping or accounting system into place as soon as possible, and it's best to separate business from personal payments, said Jim Guarino, a certified financial planner and managing director at Baker Newman Noyes in Woburn, Massachusetts. He is also a certified public accountant.
"This will become an absolute necessity for preparing one's 2023 tax return," Guarino said, noting there could be "discrepancies" between the reported gross proceeds on Form 1099-K and your actual income.
An accounting system may also make it easier to track business expenses, which may be deducted to reduce taxable income, Guarino said.
Stay organized with teen P2P payments
If your teen accepts P2P payments for a side hustle or summer job, that income may be taxable, experts say.
Many parents don't realize teens need to report that income at tax time, according to Adam Markowitz, an enrolled agent and vice president at Luminary Tax Advisors in Windermere, Florida.
Accounting does not have to be difficult, especially when you're talking about something as small as the summer job your kid is going to do for eight weeks.Adam MarkowitzVice president at Luminary Tax Advisors
"I can't even count how many times I've had to deal with that," he said. "And the 1099-K situation is going to make that harder."
Markowitz urges families to keep an Excel file detailing income received and possible business expenses, with receipts, which may be deducted to reduce taxes. "Accounting does not have to be difficult, especially when you're talking about something as small as the summer job your kid is going to do for eight weeks," he added.