Over the last decade, mobile payment platforms like Venmo, PayPal, Zelle, and others have become nearly as common place as credit cards. They’re used by individuals and businesses alike, for both goods and services, at farmer’s markets and in salons. But as these digital payment methods have grown in popularity, so has scrutiny from the IRS. If you use any of these platforms to collect payments for business purposes, it’s important that you ensure you’re handling those payments in the same manner you would handle your other business income. Keep reading to learn what you need to know about the latest IRS rules for digital payments, their implications, and how you can keep your business compliant.
Understanding the Rule Changes
Historically, payment platforms only needed to issue a tax form (specifically, Form 1099-K) if a user processed more than 200 transactions and earned more than $20,000 in a year. However, this threshold was lowered drastically via the American Rescue Plan Act, enacted in 2021; originally intended to take effect for the 2022 tax year, implementation was delayed. However, the IRS has now confirmed that enforcement is underway.
As of the 2024 tax year, digital payment platforms are required to issue a 1099-K form for any user that receives more than $5,000 in payments for goods and services. This threshold is low enough that even casual earners and side hustlers will likely see a change in their tax reporting and forms. It’s also worth noting that the IRS has expressed the intent to lower this threshold even more in future years; so, if you’re collecting only a few thousand dollars in digital payments each year, prepare for this tax form in the near future.
What’s Considered Taxable Income?
This might sound like a simple question when looked at from a business perspective, but for digital platforms that can be used for both personal and business purposes, it’s an important one to ask. Venmo, Zelle, CashApp, and other such platforms aren’t able to differentiate between the payment your friend sent you for their portion of lunch and the payment a customer sent you for the goods you sell online.
Only payments that represent earned income—meaning you provided a good or service in exchange for that payment—are taxable. However, if you’re receiving both types of payments into one PayPal or Venmo account, you may exceed the new $5,000 threshold and mistakenly trigger a 1099-K.
The Right Way to Handle Digital Payments
The complexity of handling taxes for digital payment platforms stems from the recent shift in how these platforms are used. Essentially, people used these platforms for personal payments for so long that, when they started accepting digital payments for goods and services, it didn’t occur to them to change how they used it. Payments of both types go to the same account, and you’re left with inaccurate tax reports and a mess to clean up.
If you want to avoid this kind of confusion with your business’s digital payments, here’s what you should do:
- Separate your business and personal accounts. This is absolutely essential and will dramatically simplify your tax reporting for your business income. Set up dedicated business profiles on all digital payment methods you accept, and link them to a business bank account.
- Label your transactions. Always include clear notes or memos on payments you send out; this is most important for your business account, but a good habit to implement on your personal account as well. This helps you track your expenses more easily and keeps your payment accounts organized.
- Maintain thorough records. Regardless of whether or not you receive enough digital payments to trigger a 1099-K, all business payments you receive are still considered taxable income. We’ll repeat that, because it’s important: All digital payments to your business are taxable income, even if you don’t receive a 1099-K. So, keep invoices, bank statements, and other documentation that supports your reported earnings and expenses for when you file your tax return.
- Use accounting software. Don’t rely on the payment platform’s records alone. Consolidate all of your payments into one software program for easier management and reporting of your income.
Receiving a 1099-K Form in Error
Let’s say that you didn’t separate your business and personal accounts just yet, and the combination of the two types of payments mistakenly triggered a 1099-K from the payment processor. That form means the incoming payments on your digital payment account have now been reported to the IRS as earned income. So, what do you do?
First and foremost, don’t ignore it. Whether or not you’re certain it’s a mistake, the IRS has received a copy of that form as well. If you don’t address it, the next form you receive may be a notice of overdue taxes or an upcoming audit.
Instead, compare the form to your own records, and reconcile the amount on the form with your own income reports. Contact the payment platform that issued the 1099-K and file a dispute or request a correction of the form. You can also include a written explanation alongside your tax return to outline why you’re reporting less income than what’s shown on your 1099-K.
Need Help? TAG Us In
Handling the taxes for your business—whether it’s a side hustle or your main source of income—can be complicated. If you’re not sure how to handle an incorrect 1099-K, need help filing your first business return, or need advice on how to tax plan for your growing company, contact The Accounting Guys. Our business tax experts in Provo can assist you with all of your business tax planning and tax preparation needs. Contact us to schedule an appointment today.
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