A new tax rule will impact millions of small businesses in 2022. You can thank a small change buried in the American Rescue Plan Act of 2021.
Suppose you are a small business owner or self-employed and get paid by a digital payment service like Pay Pal, Venmo, Zelle, App Cash or any third-party settlement provider that accepts credit cards on your behalf and deposits money into your bank account. If these payments were for goods and services that you sold to customers, it was previously your responsibility to ensure that you report this income on your tax return. But now, from 2022, if you receive more than $ 600 in total during the year, regardless of the number of customers who pay, your payment service is required to report that amount to the IRS.
Let’s be clear: you should report these amounts as income anyway. But the reality is that there are 30 million small businesses, freelancers, sole traders, and independent contractors in the United States and – if my customer base is any indication – many of them receiving a number of small payments from many. customers throughout the year can, well, forget about it. Especially if – as is often the case – there are a lot of small transactions or their record keeping is poor. But no worries! The IRS will now be able to find out what you earned anyway.
This means that if you sell products or services on Amazon, Etsy, eBay or at craft shows or just face to face, you can now expect to receive a Form 1099-K – after January 31, 2023 – payment services. that you are using income that they reported on your behalf to the IRS for purchases of goods and services made in 2022. How do those services know that the purchases were made for goods and services and not just a payment from a friend or family member? Most of them add an additional form during the payment process for the payer to identify the nature of the payment.
You can also expect more questions this year from your payment service provider. “You may notice that in the coming months, we will ask you for your tax information, such as a social security number or tax identification number, if you have not already provided it to us, in order to continue using your account to accept payments for the transactions of the sale of goods and services and to ensure that there are no problems when these changes take effect in 2022 â, warns PayPal in a blog post.
This helps us meet our obligations to the IRS and ensures that you can continue to use your account and access PayPal and Venmo features and services.
There will be some overlap. For example, if you are an independent contractor working for a company and you receive more than $ 600 through a payment service, you will likely get both a 1099-MISC from that company and a 1099-K from the payment service. In this situation, you would use the amount on the 1099-MISC and, assuming there are no other amounts from the payment service, you would ignore the 1099-K.
So what will the government do with this information? Nothing bad, I’m sure. They just want to know more about you and your business, that’s it! According to to the IRS the data collected will only be used for âtaxpayer education and awareness products and servicesâ as well as ânew approaches to review and collectionâ. Translation: if you don’t declare the correct amount, we’ll get you!
âFor the 2022 tax year, you should take the amounts shown on your 1099-K into account when calculating gross receipts for your tax return,â PayPal warns. “The IRS will be able to cross-reference both our report and yours.”
Happy New Year everyone !