Due to a change promulgated by the American Rescue Plan of 2021, small businesses that are utilizing digital payment services such as PayPal, Venmo, Cash App, etc., will notice a change. Any third-party settlement provider accepting credit cards on behalf of the business and putting money into the business’ bank account will have to be reported to the IRS.
Heretofore, if payments received from digital payment services were for goods and services that were sold to customers, it was previously up to you to make sure you were reporting that income on your tax return. But now, if you receive more than $600 in total in 2023—regardless of how many customers are paying—your payment service is required to report that amount to the IRS.
In full disclosure, those amounts should have already been reported as income anyway. But in reality, most small business owners just forget. Never fear, because now the digital payment service companies have the burden of submitting the required information to the IRS (and they’ll send you a 1099-K) for your tax return.
Note: The new tax rule is separate from a proposed IRS reporting requirement that originally would have handed over transaction data on accounts with more than $600 aggregate inflow and outflow. That proposal, originally part of President Biden’s “Build Back Better” plan, was raised to a $10,000 threshold after much pushback and has not yet been acted on by Congress.
So, whether you are selling products or services on Amazon, Etsy or eBay, you can now expect to receive a 1099-K form sometime around Jan. 31, 2024. The form will be received from the payment services that you’re using. Keen readers will notice that the new laws only affect goods and services. But what about keeping track of payments from friends or family members? It’s important to note that most digital payment services had these requirements in place prior to Jan. 1, 2023.
Most digital payment services now provide you with options regarding the details of your payment, and it often boils down to two questions: 1) Is this a payment between family members/friends? or 2) Is this a payment for goods and/or services? If the person sending the payment’s answer to the first question is “Yes,” then nothing further needs done. However, if the payment is for goods and/or services, the response will be noted to the digital payment service company and the receiving entity will receive the appropriate tax forms.
Some services are taking an even larger step toward compiling information related to their customers. For example, PayPal—via its official blog—recently informed users of the change. The company said compliance was necessary “in order to continue using your account to accept payments for the sale of goods and services transactions and to ensure there aren’t any issues when these changes take effect in 2023.”
Zelle, another third-party digital payment service, does not report to the IRS. This is because Zelle uses a consortium of banks that send funds directly to one another; therefore, Zelle never has custody of your money. Many businesses are switching to Zelle. This is something the IRS is catching wind of and could throw a red flag toward your business.
Roman Basi is an attorney and CPA with the firm Basi, Basi & Associates at the Center for Financial, Legal & Tax Planning. Ian Perry, staff accountant with the firm, co-authored the article.
