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February 1, 2022

Businesses Accepting Venmo and Other Digital Payments Need to Be Aware of New Tax Reporting Requirements

Certain well-known digital payment services like Venmo, PayPal and Square recently announced changes in reporting requirements for tax purposes due to new IRS guidance. While these electronic payment services are very convenient for small businesses to collect payments, it’s vital that they comply with the new reporting requirements if they receive more than $600 in business transactions during a calendar year. Below we dig into the reporting details and what will and won’t be taxed.

Businesses can expect a 1099-K for 2022 taxes

Historically, 1099-K’s have been issued by credit card companies to report payments made totaling more than $20,000 in payments and more than 200 individual transactions. The 1099-K is a tax document used to track income received through third-party payment methods like credit cards and PayPal. Per the new IRS rules, the additional tracking for digital payments exceeding $600 in a year began on January 1, 2022, regardless of the number of transactions. This means a 1099-K will not be received until January of 2023 per the new IRS requirement and will impact the 2022 tax return.

Will transactions between friends be taxed?

Don’t panic, transactions between friends or family for reimbursements are not going to be taxed, and money exchanged as a gift is not taxable. The keywords to remember here are “business transactions.” A business transaction is defined as payments received for goods and services.

Venmo tax example

If you go out to a restaurant with friends and one person picks up the check and then you send them payment for your portion of the bill, you won’t be taxed on this, and neither will they. However, say your best friend and her mom run a flower company and you send them a Venmo for a beautiful bouquet of flowers, this payment will be reported on their company’s year-end 1099-K, assuming they received more than $600 in total for the year.

If I’m a business and collect digital payments, what should I do next?

If you have been using a digital payment provider and reported the income on your tax return, nothing will change. If you were previously using a personal account for business payments, consider creating a separate business account with your preferred payment provider. When using a business account, ensure the tax information is confirmed within the account profile and include a valid SSN or EIN for tax reporting. Individual transactions can be tagged as a business purchase to eliminate any confusion. Upon receipt of the 2022 1099-K, provide the tax document to your accountant to ensure income is properly reported on the tax return.

Contact your Anders advisor with questions around how the new reporting requirements will impact your business.

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