New IRS Rule 1099 for PayPal and Venmo targets very small businesses and will lead to misreporting and errors

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Theirs recently announced that payment apps such as PayPal, Venmo and CashApp will be required to issue 1099s to small businesses and the self-employed. This should be concerning, but you should at least make sure you are aware of the rule and its implications.

The new rule is aimed at very small businesses and individuals with a secondary activity

Beginning with the 2022 tax year, payment applications will be required to report to the IRS the total payments received by a business account greater than $600 per year. This new requirement is clearly aimed at smaller businesses and people with a side business, as the previous rule only required a payment app to report when an account has received more than $20,000 and completed 200 or more transactions. during the year. Those micro businesses that previously raised less than $20,000 per year did not fall under the 1099 rule, but will now be treated like any other business, large or small.

Related: Venmo has integrated crypto trading into its payment app

A small business, including someone with a secondary hustle, must report income received whether or not a 1099-K was issued from a payment application. It’s something businesses big and small have been dealing with for years with payment apps and credit card processors. However, these very small businesses that are now subject to the new rule do not have their own in-house tax departments or a CPA who prepares their taxes to help them with the many revenue issues and questions that arise during receiving a 1099-K.

Small businesses worry about two 1099s being reported for the same income

Ignatius L. Jackson, a Phoenix CPA, worries that income could be counted twice if payment apps “send a 1099-K to a small business for payments received and the business making the payment also sends a 1099-NEC, essentially double counting the income.” Take the example of a graphic designer who freelances part-time and is paid $3,000 by a single client for his work through PayPal. The freelancer will receive a 1099-K from PayPal for the $3,000 and will also receive a 1099-NEC from the company. client for whom they worked for an amount of $3,000. Since two 1099s are reported, it looks like the freelance designer won $6,000. The IRS actually requires businesses to issue a 1099-NEC to contractors they pay even if they know the contractor will also receive a 1099-K from their payment application. The IRS requires two 1099s in this case, and it will confuse and over-report income for the self-employed and very small businesses.

While proper accounting procedures and bookkeeping can help avoid double counting of income, self-employed people with side hustle, freelancers, and smaller small business owners simply don’t have the resources or the time. technical expertise to enter these accounting details and end up doing their taxes with multiple 1099 forms reporting the same income. Mr Jackson said: ‘I anticipate it will be a disaster when those 1099-Ks start going out and taxpayers will probably have to pay someone to help them with their tax returns when they normally could. do it themselves.”

Concerns about misreported personal payments

PayPal and Venmo have two different account types: personal and business. Presumably they will only report 1099-Ks on business accounts and business owners can create a separate business account and have their customers pay for that account. Despite the two-account option, it will be very common for business owners to receive personal payments to their business accounts, and these amounts will be included on their 1099-K to the IRS.

The examples are countless and occur in some of the most common self-employment situations. Consider a hairdresser who goes out for a drink with a friend who is also a customer, and that friend ends up splitting the cost of the drinks and paying for his hairdresser friends’ business account. Or consider the child care provider who is paid $7,000 a year for their services, but incurs and is reimbursed an additional $2,000 during the year for gas or food purchased to care for children. children. If the custodial provider is paid through Venmo for the full $9,000 for the year, their 1099-K will reflect $9,000 in gross income, not $7,000 which is the taxable portion of the payments. These self-employed individuals and taxpayers can certainly deduct travel and food expenses as expenses from income, but this will create a significant record-keeping burden for them to verify the amounts reported on their 1099 forms to ensure that ‘they don’t report more income. that they did not receive.

Related: Visa, PayPal to let customers pay with cryptocurrency

Tips for following the new Venmo/Paypal rules

Small businesses that will start receiving 1099s under the new rules should keep the following three key tips in mind to avoid over-reporting their income on their taxes.

  1. Separate your business and personal account payment apps. Small business owners and self-employed individuals should use a separate business account for their business activities. They should only use this payment account for business income and expenses, and it should be linked to their separate business checking account. They should be careful not to receive personal reimbursements and funds in their business payment account, as these amounts received will end up on their 1099-K which is reported to the IRS.
  2. Track expenses and reimbursement amounts. Keep good records of your business expenses and the amounts paid to you that are reimbursements for expenses you covered for your client. These amounts are used to reduce gross income reported to the IRS via a 1099-K, but you must keep good records and track these items in order to deduct them.
  3. Do not double count income on the 1099. There will be many instances where a self-employed person providing services to a business client will receive a 1099-K from the payment application and will also receive a 1099-NEC from the same client for the same payment. Self-employed people and small businesses using payment apps should make sure they don’t double-count these amounts on their tax return and should carefully track their business earnings so they don’t get taxed twice on the tax return. same income. Don’t just rely on the 1099s themselves to track your earnings. They can result in overpaid taxes because the payment application must report the payment, just like a business customer paying the small business or freelancer.

These new rules are sure to create new headaches, but like anything else, stay up to date and do your due diligence and they shouldn’t cause undue pain.

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