If you live in Texas, you may benefit from learning more about the new tax-reporting law affecting payment apps. Mobile payment apps like Cashapp, Payal, Venmo, and Zelle are now required to report commercial transactions totaling more than $600 per year to the Internal Revenue Service. This new IRS rule is a part of the American Rescue Plan that was signed into law in March 2021.
New IRS rule for payment apps
The new law helps ensure that small businesses and sole proprietors using third-party payment networks like mobile apps are paying the appropriate amount of taxes. Previously, third-party payment networks were only required to report gross payments exceeding $20,000 or over 200 transactions within one year. As of Jan. 1, 2022, third-party payment networks must send account holders Form 1099-K for any transactions made electronically or by mail. This new change applies to the returns filed in 2023.
Reporting mobile payments to the IRS
By Jan. 31, third-party network providers must send account holders a Form 1099-K detailing all the electronic forms of payments received during the previous year. Due to the new IRS tax law, payment apps may require account holders to provide an Employment Identification Number or Social Security Number if it’s not already on file. The form will contain all the online and credit card payments so that any taxable transaction can be reported on the income taxes.
The new IRS rule for taxpayers
This new rule is designed to help the IRS account for the increasing amount of unreported taxable income facilitated by popular mobile apps. The onus now falls on the taxpayer to explain to the IRS why the income reported on Form 1099-K is not taxable. This new reporting rule is solely for goods and services rendered; reimbursements, gifts and rent transactions between friends and family are exempt.