IRS extends relief for taxpayers using Cash App and Venmo
Amidst the evolving landscape of digital payments, taxpayers utilizing platforms like Cash App and Venmo have been granted further reprieve from impending changes that would demand increased reporting to the IRS.
Delayed changes as new reporting rules take a back seat until 2025
Currently, users of payment apps are obliged to report substantial payments or numerous transactions, with a 2021 law proposing a shift by requiring apps to issue a Form 1099-K for transactions exceeding $600. The IRS, initially postponing the new requirements to the 2024 tax filing season, has now extended the grace period until 2025. To facilitate a smoother transition, the reporting threshold during this transitional phase will be reduced from $20,000 to $5,000.
Navigating current reporting rules for payment apps
Under the existing law, payment apps, categorized as "third-party settlement organizations," must issue Form 1099-K if:
Gross payments exceed $20,000.
More than 200 transactions occur within the year.
The impending changes will broaden the scope, necessitating Form 1099-K for any payments over $600 for goods and services, regardless of transaction count.
Unveiling the timeline as phased approach to reporting changes
For the 2024 tax year, the IRS plans to initiate a $5,000 reporting threshold, marking a significant departure from the current standards. The news release does not specify when the $600 standard will come into effect, emphasizing the IRS's commitment to minimizing burdens during this transition.
Exclusions and clarifications to help you understand the Form 1099-K reporting
Payment companies involved in settling funds, essentially facilitating the transfer of funds in transactions, are mandated to send 1099-Ks to users. Notably, Zelle, as clarified by Early Warning Services, is exempt from the new law as it functions as a messaging intermediary, not a fund settler.
Taxpayer Responsibility and handling Form 1099-K and ensuring accuracy
Taxpayers can anticipate receiving Form 1099-K from third-party networks or financial institutions by January 31 each year, detailing income from the previous year. While the new law introduces reporting requirements, it does not alter existing tax laws regarding taxable income. Ensuring proper classification of transactions is crucial, especially for those receiving money for non-taxable items.
Recordkeeping essentials as a tool for tax compliance
With Form 1099-K potentially encompassing both taxable and non-taxable income, meticulous recordkeeping is indispensable. Utilizing systems that capture income and expenses, be it electronic or paper-based, is advised. For business owners, maintaining a separate platform for business and personal transactions, coupled with diligent record-keeping, can be pivotal in navigating IRS audits and ensuring tax compliance.
