The way the US Internal Revenue Service (IRS) reports transactions made through payment platforms such as Venmo, Cash App, and PayPal has undergone significant changes.
Enhancing control over earnings from digital applications is the goal of these actions, especially in business and professional endeavors. The program affects independent contractors, small business owners, and online retailers.
The IRS has announced new changes as people will have to report transactions made through digital applications
The reforms aim to reduce tax evasion in the context of increasing economic digitization. By progressively reducing income reporting requirements, the IRS hopes to ensure accurate reporting of business operations.
These steps are part of a broader plan that will include the USD 600 barrier set forth in the 2021 American Bailout strategy. Since last year, millions of users of digital platforms have been subject to new regulations.
Even though they don’t apply to personal transactions, the limitations will have a big effect on sectors like freelancers, small business owners, and internet sellers, requiring adjustments to account management and tax compliance.
What are the changes to the IRS reporting thresholds?
The income reporting requirements specified in Form 1099-K, which collects information on payments made via third-party platforms, have been altered by the IRS. Businesses had to report at least 200 transactions and more than USD 20,000 in revenue annually until recently.
According to the Internal Revenue Service, starting in fiscal year 2024, this threshold will be progressively reduced:
- Fiscal year 2024: Platforms will report transactions exceeding USD 5,000 annually.
- Fiscal year 2025: The threshold will be reduced to USD 2,500.
- Fiscal year 2026 onwards: The minimum threshold of $600, initially established in the 2021 U.S. Bailout Plan, will apply.
The IRS has clarified, however, that these regulations only apply to payments made for business and professional purposes. Payments made between friends, family, or in other private transactions will not be subject to these regulations.
Who is affected by the new tax requirements?
The law will have a significant effect on industries like internet retailers, freelancers, and other small business owners who rely on these networks to make money.
According to the IRS, taxpayers must report income from goods or services and ensure that they distinguish between business and personal transactions. Additionally, they ought to keep detailed and accurate records of all of their financial dealings.
This process will require the use of Form 1099-K, which provides information on income processed by digital apps. Platforms like PayPal and Venmo have already begun alerting their users to the changes, telling them to update their tax information and keep their personal and business accounts separate in order to comply with the new regulations, according to AP News.
What are the exceptions to the new IRS regulations?
The IRS has made it clear that the amendments have no bearing on transactions that are not connected to business or professional activity.
Financial gifts or transfers between friends to split an account, for example, will not be documented under the new rules. This specification aims to reduce the likelihood of unnecessary reporting and avoid misunderstandings.
How to prepare for tax changes on digital platforms?
To achieve compliance with the new laws, the IRS advises some techniques that will assist taxpayers in managing their tax duties more efficiently:
- Update the tax information: Check that your tax identification number (TIN) or Social Security number (SSN) is appropriately entered on payment platforms.
- Separate personal and professional accounts: This will make income management easier and save misunderstanding at tax time.
- Maintain clear records: Keeping accurate records of transactions allows you to distinguish between taxable and non-taxable income.
- Consult with specialists: Working with a tax advisor can help you grasp the implications of changes and comply with requirements.