Americans who made money online last year temporarily escaped a brutal tax shock this year.
The Internal Revenue Service (IRS) said in November it was once again delaying a controversial tax reporting requirement targeting Americans who earn more than $600 online through third-party payment applications such as on Venmo, PayPal or Cash App.
The rule change – approved by Democrats in March 2021 to pass the American Rescue Plan – requires payment platforms, including Venmo, PayPal, Etsy and Airbnb, to send Form 1099-K to the IRS and users when their transactions are more. than $600 over the course of the year.
Instead, the IRS will consider 2023 “an additional transition year,” meaning that payment applications will not require users to send Form 1099-K unless their gross income exceeds $20,000 or they have 200 separate transactions within a calendar year.
Beginning in 2024, that basic reporting threshold will increase to $5,000.
Business owners are now required to report that income to the IRS.
The new rule means the IRS will know what business owners earn on cash apps, regardless of what the individual actually reports on their 1099-K, as it expands the scope of threshold.
“When they came out with the $600 threshold, people were like ‘Woah, that’s a big change,'” Eric Bronnenkant, head of tax at online financial adviser Betterment, told FOX Business. “There are a lot of people who are receiving payments through some kind of platform like that, whether it’s eBay or Venmo, which you know can trigger reporting.”
The rule only applies to payments received for transactions of goods and services, meaning using Venmo or PayPal to send a gift to a loved one, pay rent to a roommate or pay a friend for dinner is not included. Also excluded is anyone who receives money from the sale of a personal item at a loss. For example, if you buy a sofa for $300 and sell it for $250, the amount is not taxable.
“This does not include things like paying your family or friends back using PayPal or Venmo for dinner, gifts, shared trips,” PayPal said previously.
The change is intended to prevent Americans from avoiding taxes by not reporting the full extent of their gross income.
However, critics say it amounts to government overreach at worst and that it will ultimately hurt small businesses.
Form 1099-K is used to report payments for goods and services received by a business or individual during the calendar year, but with certain exclusions from gross income that are not subject to income tax, including amounts from the sale of personal items lost, amounts. sent as reimbursement and amounts sent as gifts.
If implemented, the low reporting threshold threatens to wipe out millions of Americans who earn money online.
Approximately one in four Americans earn extra income on the side by selling something online, renting out their home or using a digital platform to do work, according to Pew Research. Center.