IRS to Tax Third Party Apps

Tonya King, owner of Kings Klutches, left and Shawntinique Wiggins, Partner at 7965 Consulting, right. 


Third party payment apps, in recent years, have gained popularity as a quick way to send and receive money from friends and family. Business owners have also been able to cash in on the apps. In lieu of cash, entrepreneurs accept payments via apps like Cash App, PayPal or Venmo. Now, the IRS plans to keep a tab of money exchanges causing a shift for the 2022 tax year.  


A new rule set to take effect in 2022 will now target third party payment apps. Made popular in recent years, Zelle, PayPal, Cash App and other like apps will now be monitored by the IRS. Previously, a $20,000 dollar threshold was in place, making that amount more taxable. Now, income totaling $600 or more will cause the IRS to send out a 1099 form for self-employment.  


“The new IRS stipulations have a huge effect on income tax filers for 2022. Biden signed into law a modification to IRS reporting requirements on digital transactions. It was modified from its prior $20,000  payments and 200 transactions to a new threshold of $600 payments with no minimum transactions. This rule will take effect on Jan. 1, 2022,” says Shawntinique Wiggins, Partner at 7965 Consulting. “Now, this new reporting rule applies to business transactions and sellers of services, not friendly transactions to family and friends. The IRS is looking for those who use cash apps as a way to circumvent banks and traditional forms of income reporting.  However, to be honest, this law is really no different than the current law of paying taxes on income of $600 or more, it’s just being enforced more.”  


The American Rescue Plan, passed in March 2021, includes new guidelines for entrepreneurs and those who receive under-the-table payments. Business owners have been utilizing the payment apps as an additional method of payment for goods and services. Though business interactions will now be taxed, personal financial exchanges will remain tax-free. Businesses who use third party apps for both business and personal may see some murky guidelines.  


“I think the issue will rise if they are able to keep all funds in the same account. Unfortunately business owners may have to use the business side of the apps versus personal to save themselves. Personally, I do not have a problem with completely stopping the use of it for my business,” says Tonya King, owner of online store Kings Klutches. 


“I do not think it will have any effect on my business. I take cash and cards outside of my website for payment. I do not believe all third party payments will make a difference. Such as Paypal, it is used on several websites on a higher scale,” says King.  


Failure to pay could result in harsh penalties from the Internal Revenue Service. The new tax law may also add a layer of the honesty policy as it forces business owners to pay more attention to their financial interactions.  


“It will force those to be more truthful if they weren’t before. Also paying taxes if they hadn’t,” says King 


For preparers, helping tax filers for the 2022 year may look slightly different. Those who have never filed a 1099 may find keeping records difficult. However, preparers are offering some tips to help stay organized.  


“Filers can assist me in getting accurate records for their income by keeping track of it by using excel sheets, accounting software such as Quickbooks or even a financial notebook. Knowing your business income is very crucial to operating a financially healthy and successful business,” says Wiggins.  


Users with only one profile may want to consider adding additional profiles for their third party payment apps to keep business and personal transactions separate. Muddled finances could trigger the IRS and warrant a deeper dive into business and personal finances.  


“Keep your business and personal income separate. If you are using Cash App, atleast have a separate one for business transactions only. That goes for Venmo, PayPal and any other third party apps. You want to keep all business and personal income separate no matter what to help avoid confusion and even tax audits,” says Wiggins. “My goal is to help you as a business owner stay IRS compliant and know the financial health of your business.” 


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