3rd party payments: Learn how to report outside transactions

Ro Williams
By Ro Williams

Form 1099-K filing requirement has been delayed until 2023 filing year.

Do you accept payments via Cash App, Venmo, or PayPal? Here’s what you need to know about filing a 1099-K and staying in compliance.  

The surge of third-party payment platforms like Venmo and CashApp, has been a game-changer for many small businesses. These mobile payment apps have eliminated much of the friction that comes with sending and receiving funds and allow business owners to track transactions in near real-time. Seems like a win-win, right? 

Well, as if the upcoming tax season wasn’t stressful enough for small business owners, the government is cracking down on payments received from third-party apps — and changing the tax reporting requirements in the process. It’s their solution for addressing the tax gap (the difference between how much Americans owe in tax, and how much is actually getting paid), targeting businesses and individuals that skirt income reporting to avoid paying taxes. 

Get ready, we’re about to break down the latest change in the world of business tax and share what you need to know to ensure you’re staying in compliance.

Understanding the new third-party payment tax rules   

You’re likely pretty familiar with mobile money apps such as Cash App, Venmo, Square, or Zelle. Previously, the IRS only issued a 1099-K if a small business showed at least 200 transactions or roughly $20,000 in gross payments

Now, as part of the American Rescue Plan, when you receive more than $600 for goods or services from one of these platforms, you too will receive a Form 1099-K. 

On the flip side, third-party payment processors will also send a 1099-K to those business owners who pay for goods or services. For example, if you paid a contractor more than $600 for services in the past year, both you and the contractor will receive a 1099-K form. 

It’s important to understand that third-party payment processors are not reporting your income to the IRS on your behalf. You’ll still need to use this information, along with your accounting records, to produce 1099s and W2s come mid-April. 

If you’re a contractor, you will additionally receive a 1099-NEC from the business owner to whom you sold your services — so long as it totaled more than $600. You’ll use the information from these forms, along with your accounting records, to report your non-employee compensation to the IRS and your state or local taxing authority.  

Don’t worry if you’ve used mobile money apps between your family or friends. The payment processors filter peer-to-peer transactions and won’t qualify those as income.

What happens if I forget to report the info on my 1099-K?

Not reporting information from your 1099-K on your tax return can result in several different tax-related penalties, including tax fraud.

Don’t waste your hard-earned cash on expensive tax fines or fees. Keep track of all your tax forms and deadlines with the business tax solutions from ComplYant. Try us free

Ro Williams
By Ro Williams
Ro Williams J.D, MBA, is a part of the tax research team at ComplYant, a technology platform offering business owners and entrepreneurs a simple way to manage tax rules and requirements. Ro is an experienced professional in the tax industry and has previously held positions at an International Law firm and Public Accounting firms.

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