Why you need to keep thorough records of payment app income

On Behalf of | Apr 22, 2022 | IRS Tax Law

If you are a freelancer based in Texas who receives payment for your work through various electronic payment apps, make sure you keep thorough records of how much each client pays you. Starting with the 2022 tax season, these apps will report your income to the Internal Revenue Service.

New tax reporting requirements

A provision in the 2021 American Rescue Plan calls for earnings over $600 paid through PayPal, Venmo, Cash App and similar electronic methods to be reported to the IRS. This new version of tax law has confused some freelancers and gig workers who may have already accounted for income received through these apps. The legislation doesn’t involve a change in taxes but is a change in tax reporting.

Why is the U.S. government changing reporting?

Self-employed individuals and freelancers should always report the income they earn, no matter how they receive it. However, many don’t, and the IRS knows this. Before the legislation, electronic apps would only report income to the IRS if users had more than 200 commercial transactions and made more than $20,000 annually. Electronic apps will now issue a 1099-K tax form to you if you earn $600 or more annually for goods or services.

What does this mean for your income taxes?

Make sure that you keep comprehensive records now if you haven’t already done so. The IRS will start taking a closer look at your income taxes beginning with your 2022 tax return. Comprehensive records of payments made to you and your business expenses will help you prove your case if the IRS decides to conduct an audit.

You may also want to separate your business and personal electronic payment accounts. Personal payments from friends do not count as income through electronic apps.