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Venmo, Other Third-Party Payment Apps Required to Report Business Transactions Greater Than $600

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If you’re a business that accepts payments through apps like Venmo or PayPal, get ready for more record-keeping — and maybe even a higher tax bill — for 2022.

Starting this tax year, the IRS lowered the reporting threshold to $600 for business income from Venmo, PayPal and other third-party payment apps. Previously, businesses received Form 1099-K — through which people report business income — when they earned more than $20,000 and had more than 200 transactions on a payment app in a calendar year.

“Now is the time to start addressing how these changes will impact your business, so don’t wait,” LendingTree chief credit analyst Matt Schulz says. “Ignoring or putting them off will only make things more difficult on you and your business, which is the last thing any business owner needs.”

Here’s what this change means for businesses and how to prepare for it.

What the change means for businesses

The reporting threshold on third-party payment methods was lowered to $600 as part of the American Rescue Plan Act of 2021, the COVID-19 relief legislation signed into law in March 2021.

As a result, the lower annual threshold means that a larger amount of money on payment apps may be reported as taxable income for businesses. In addition, the removal of reporting for only businesses with more than 200 transactions will increase the amount of taxable income reported. Third-party payment apps including Venmo, eBay and PayPal expect that the new requirement means they’ll be sending Form 1099-K to more businesses than in previous years.

While it’s impossible to predict how the lower reporting threshold will affect individual businesses, the change could spell a bigger tax bill when it’s time to square up with Uncle Sam.

“There’s no question that this will lead to some small business having to report a lot more of their income,” Schulz says. “That’s a big deal, especially when you consider how thin many small businesses’ profit margins are. This change may also create logistical challenges as businesses are forced to ramp up their record-keeping around these payments.”

Because this reporting threshold applies to the sale of goods and services, this change primarily impacts businesses and people who use these apps to sell products. It doesn’t apply to personal users sending electronic payments to friends or family for reimbursements, gifts or other reasons.

According to a recent LendingTree survey, 14% of payment app users utilize their accounts for receiving business payments.

5 ways businesses can prepare

With these major changes for 2022, here are five actions businesses can take to prepare.

1. Assess how the change will affect your business

With the lower threshold for reporting, Schulz says the first thing to do is to evaluate how this will impact your business.

“If they don’t have a firm grasp on just how much money they take in each year through apps like Venmo and PayPal, they need to figure that out in a hurry because they can’t have a meaningful plan to attack a problem if they don’t understand how big it is,” he says.

Then, Schulz says, it’s decision time.

“Once you’ve gotten a handle on that, you can start making some potentially tough decisions on what to do next,” Schulz says. “Unfortunately for some, that might include raising your prices to cover that tax bill.”

You might also want to reconsider the payment methods your business accepts. Because of the change, you may want to eliminate third-party payment apps and only accept credit and debit cards, though both of these payment methods require the merchant to pay transaction fees. Or, if you want to streamline the number of 1099 forms you receive, your business may want to only accept one payment app, like Venmo.

2. Separate business and personal finances

Keeping business expenses separate from personal ones is a best practice for managing small business finances. Of the 14% of businesses using payment apps, only 3% have separate accounts for business expenses, so this is especially noteworthy.

“If you aren’t already separating your personal Venmo or PayPal payments from your business transactions, now might be the time to change that,” Schulz says. “Mixing business and personal expenses can make record-keeping even messier than normal.”

3. Use an accounting software program

The lower threshold for issuing 1099-K forms means businesses may have more receipts to track. An accounting software program can help you with record-keeping when it’s time to file business taxes. If you don’t have time or need help with record-keeping, you can consider hiring a bookkeeper.

4. Prepare for tax season

With the reporting change going into effect in tax year 2022, Schulz recommends extra preparation for filing your business taxes this year.

“If you suspect that these reporting changes will send your tax bill higher, change up your business budget to set more money aside for future tax payments,” he says. “That may be a difficult pill to swallow, but the sooner you can begin preparing for these changes, the better off you will be.”

“Consulting a tax professional may be advisable,” Schulz says. “It won’t be cheap, but their advice may save you money in the long run.”

5. Tell other small business owners you know about the change

Even if you aren’t a small business owner, Schulz recommends talking to business owners to make them aware of the lower reporting threshold.

“If you have friends who own small businesses, talk to them about these changes and why they matter,” he says. “Lots of small business owners around this country won’t find out about these changes until they get a 1099-K in the mail, and that’s troubling.”

 

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