Third-Party Reporting

Hello, readers! Welcome back to the Hoods Tax & Accounting blog! If this is your first time here, welcome! We’re delighted to be able to share up-to-date information about taxes, bookkeeping, and accounting. Our blog is also dedicated to educating you about tax-advantaged savings accounts, tax provisions, programs, and more! We aim to provide you with the tools needed to meet your short and long-term goals. Our seasoned professionals are experts on the tax code, eligible deductions, and QuickBooks—all necessary fundamentals for saving you money! The Hoods Family has been around since 1988 and our comprehensive accounting and tax planning services are among the best in the Lowcountry. If you’re in need of tax preparation, accounting, QuickBooks training, or business consulting services, do not hesitate to schedule an initial consultation! We are officially in tax season, and Tax Day is fast approaching. We recommend preparing early to maximize your savings and refund. We do offer contactless services using a combination of over-the-phone consultations and digital drop-offs, for safety and convenience. You can read more about our hours and submit a request for a meeting using our website!

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Today, we’ll be talking about third-party reporting. In this context, a third party is an app or payment network that allows users to send and receive money. One good example of this is Venmo, a mobile payment service that was originally aimed at friends and family for splitting bills like rent or dinner costs. It can also be an online marketplace where users buy and sell goods, such as eBay, Etsy, or Mercari. Services like this have become increasingly popular, especially recently, as our world relies on technology more than ever. However, a new law in place may have implications for taxpayers. If you regularly use payment networks and are interested in learning more, you’re in the right place. Let’s get started!

Besides Venmo, other payment networks available include Cash App and PayPal. These networks are sometimes referred to as P2P, or peer-to-peer, payment services. They allow users to use their bank account, credit, or debit card to pay friends or family via cellphone. These services also allow users to designate transactions as “goods and services” if they are purchasing from a business. This includes small businesses or someone who is creating hand-made items and selling them from their home. In other words, goods and services consist of tangible items sold to customers and tasks or services performed. Many people, including independent contractors, use these payment services for these types of transactions, but everyone using these services should be aware of a recent change in the tax code. 

Beginning on January 1, 2022, a change in the tax code was signed into law as part of the American Rescue Plan Act, which was a stimulus bill passed in response to the COVID-19 pandemic. This change declared that mobile payment apps were required to report commercial transactions totaling more than $600 per year to the Internal Revenue Service (IRS). Previously, these apps were only required to report when a user had over 200 commercial transactions per year that exceeded $20,000 in total value. Now, with the amount being much less, it could pose a problem for small business owners or those with side hustles, which bring in extra money beyond one’s regular job. Let’s take a closer look at what this means for those who regularly use payment networks or online marketplaces.

It is important to note that this amendment to the tax code only applies to transactions marked as “goods and services”. Most payment apps like PayPal allow users to mark a transaction as either “friends and family” or “goods and services”. This means that if you are sending money to a friend for splitting a dinner bill, you should make this transaction as “friends and family”. If you are paying someone for a tangible item or a service, you should use “goods and services”. In other words, this change to the tax code only applies to commercial goods and services, not personal charges to friends and family. 

If you receive more than $600 annually in commercial payments on mobile payment apps like Venmo or through an online marketplace like eBay, the third-party app or website must file a Form 1099-K. This form is also known as Payment Card and Third-Party Network Transactions and is used to report certain payment transactions to improve voluntary tax compliance, according to the IRS. These third-party apps are now required to send users a Form 1099-K by mail or electronically if they accrue more than $600 annually, with no minimum transaction. This means, for example, if you sell only 10 items this year, but the total payment you received is more than $600, you will receive a Form 1099-K. 

The third-party app may request additional information for you in order for them to properly report your transactions. Recently, Mercari, an e-commerce company, sent users notifications asking them to complete a W-9 form. This form gives Mercari the information they need to file a Form 1099-K if a user should sell more than $600 annually. Mercari warned users that if they do not submit their W-9 form, their selling experience will be restricted in the fact that they will not be able to sell beyond $600. 

It is important to note that when a third-party app is reporting your accrued income on Form 1099-K, they are required to report the total gross income. This means that they do not consider any adjustments, discounts, or refunds. For example, if someone purchases an item for you but it was damaged in transit and you refunded the buyer, the initial payment you received is still reported– Even if you gave it back. If someone purchased an item from you and then canceled, getting their money back, this transaction is still required to be reported, even if you didn’t keep the money. It is also important to realize that this change to the tax code does not affect buyers. There is no limit to how much money you can send or how many goods you can purchase. Third-party reporting only applies to people accruing income. 

Another increasingly popular payment app is Zelle, a payment network that allows users to send and receive money directly through their bank accounts. Zelle facilitates messaging between financial institutions, and does not handle settlement of funds, therefore they are exempt from this change in tax code. There are no taxes imposed on transactions made via Zelle, and the network does not report transactions to the IRS. The company has stated that if Zelle users are receiving taxable income, it is their own responsibility to report it to the IRS. 

With that being said, it is extremely important that you keep track of all of your income– Even from selling on an online marketplace or receiving payment via “goods and services” on a mobile payment app. Typically on mobile payment apps or online marketplaces, a user can view a summary of their transactions. However, you may want to take this a step further and manually record all of your income in a notebook. 

As you can see, this recent change to the tax code is likely to affect many small business owners, independent contractors, or people who simply have a craft business to generate extra income. We hope you found this article helpful, and we encourage you to reach out to us if you have any questions about your tax obligations. Here at Hoods Tax & Accounting, our tax professionals are always eager to give our clients as much help as possible when it comes to their finances. If you have any questions regarding your taxes, or if you need help with tax planning, contact us! Hoods Tax & Accounting offers a variety of services including small business consulting, QuickBooks training, tax preparation, accounting, payroll, and more! Visit our website for more information, as well as helpful links to resources you may find useful. Thank you for reading and we hope to see you back next time to keep learning about various tax and accounting topics!