IRS Creates Confusion With Delay Of $600 Reporting Rule

As part of the American Rescue Plan Act of 2021, the Internal Revenue Service (IRS) began requiring a new reporting rule for individuals who get paid via third party apps like PayPal
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and Venmo. This rule stated that, for the 2022 tax year, the IRS would lower the reporting threshold to $600 for certain types of money transfers.

According to enrolled agent Christopher Jervis of Lone Wolf Financial Services, this new reporting rule aimed to accomplish a few different goals. First, it would make requirements for 1099-Ks similar to requirements for other 1099s, such as the 1099-NEC received for services performed for a company.

Jervis adds that, prior to this change, payment processors only had to report a 1099-K if transactions exceeded a much higher dollar threshold or a certain number of transactions in a year ($20,000 a year and/or 200 transactions a year).

Jervis adds that another intent of the rule involves capturing unreported income and making sure more people pay their share of taxes. After all, more and more people are doing side jobs or gig work and getting paid online these days, and much of that income may be falling through the cracks. It’s even common for professional freelancers to accept at least part of their regular income through money transfer apps, even if they’re taking on projects that pay tens of thousands of dollars over the course of a year.

The problem for the IRS is the fact some types of work don’t come from other businesses that issue paperwork for tax purposes. In today’s side hustle-heavy environment, there are actually a lot of ways to work and get paid that could easily fly under the radar.

“Someone might do a series of handyman jobs and earn $10,000 across the year, but because it was from individuals or companies who did not issue 1099s, the money was in many cases not reported by the person earning it,” said Jervis.

“This led Congress to shift the responsibility to payment processors like Venmo, Cash App, and Paypal to report payments made through their platforms.”

According to PayPal, however, it’s important to note that the rule only applies to some kinds of money transfers. For example, the new threshold for reporting was created to apply only to payments received for goods and services.

“This doesn’t include things like paying your family or friends back using PayPal or Venmo for dinner, gifts, shared trips, etc.,” shares PayPal in a press release.

The $600 Rule Is Delayed: Now What?

Crazy enough, the IRS announced its intention to delay this rule on December 23, 2022. This means third-party companies are not required to report transactions over $600 on a Form 1099-K to the IRS for the 2022 tax year. Instead, the IRS says the upcoming months may serve as a “transition period” to help companies prepare for the change.

“The IRS and Treasury heard a number of concerns regarding the timeline of implementation of these changes under the American Rescue Plan,” said Acting IRS Commissioner Doug O’Donnell in a press release published on IRS.gov.

“To help smooth the transition and ensure clarity for taxpayers, tax professionals and industry, the IRS will delay implementation of the 1099-K changes. The additional time will help reduce confusion during the upcoming 2023 tax filing season and provide more time for taxpayers to prepare and understand the new reporting requirements.”

Obviously, this last-minute delay has created some confusion for gig workers and others who accept payment through money transfer apps and might have been preparing for the change.

However, Jervis says that nothing has really changed for taxpayers since they have always been responsible for accurately reporting all income.

“That hasn’t changed with this new and now delayed proposal,” he says.

With the new $600 reporting threshold delayed, Jervis says we can all simply revert to the situation at hand prior to the change being discussed.

“Taxpayers who received over $20,000 or who had more than 200 transactions will receive a 1099-K,” he said. “Those who did not meet those levels may not receive a 1099, but they are still responsible for accurately reporting information on their tax return.”

Next Steps for Taxpayers

Steven J. Weil, Ph.D of RMS Accounting says there are steps consumers can take now to prepare for the new $600 reporting rule that will likely be implemented in the coming years. For example, Weil says you should check whether your money transfer app gives you the option to mark transactions like gifts and reimbursement as personal payments instead of business revenue items.

“It may even make sense to get a separate app or account for business vs. non-business transactions,” he said. For example, you could use two different PayPal accounts for personal and business payments, or you could opt to use Venmo for personal transfers and PayPal for business only.

“As always, any income received for business activity or as payment for services needs to be properly reported on your tax return,” said Weil.

Weil adds that the new threshold will make it more important than ever to start keeping records of all money you receive along with the nature of the payment.

“When this plan is fully implemented, I would bet that many will be unprepared to prove to the IRS that the $500.00 received from a friend was for their share of the football tickets bought so they could go to the game with you, or that the money you got from other PTA moms for giving their kid the lunch money that was left at home,” he says.

Weil adds that you may even want to switch back to carrying cash again and using that to avoid the hassles of proving money received was not income.

If you’re worried about owing more taxes when this reporting rule does eventually go through, the IRS says it also may be time to start paying estimated tax payments throughout the year.

“If they are in business for themselves, individuals generally need to make estimated tax payments. Estimated tax payments are used to pay not only income tax, but other taxes as well, such as self-employment tax and alternative minimum tax,” they write.