The IRS is coming for your cash app
Venmo, Zelle, PayPal… all the new ways society is getting used to sending, receiving, and requesting cash without ever needing a physical wallet. However, as we start to track more finances on our smartphones, the IRS is using the data to better enforce the tax code. Here is what consumers need to know about changes in the IRS tracking of cash transactions.
Before we get started, we are financial advisors in La Jolla, California. We are providing this article as general guidance on the issues we see as wealth managers in the course of working with our clients. Nothing in this article may be interpreted as advice specific to any one individual as we are not tax advisors or CPA’s. For tax advice specific to your situation, consult your CPA.
The “Side Hustle” Era
Small businesses and side hustles have grown into a glory age of creating extra income. Whether operating a stand at a local farmers market or receiving payment for babysitting, these money transfer apps have helped many payers and payees transfer money with ease.
Has this golden era of not reporting these side hustles to the IRS reached its end?
As of April 2024, users who are utilizing these platforms for business service payments might be receiving a Form 1099-K from cash apps. Form 1099-K is generally used to report payments that aren’t typically from an employer. Taxpayers can expect this for any business-related transactions where the amount exceeds $600. The good news is that family and friend payments will not be included.
What are some examples of transactions that could potentially count as a “business-related transaction?
Selling an item on Etsy.
You walk dogs or babysit and are paid through Venmo.
You provide freelance tutoring services and were paid through Stripe.
You sell an old piece of furniture on Offer Up or eBay for more than what you bought it for.
What wouldn’t count?
An amount sent by grandma as a gift.
Sending a split bill amount to a friend who paid for dinner.
Uber ride/transportation transactions that are already captured on a separate 1099.
Again, just to be clear, this is general guidance that may not be construed as personal tax advice. Ask your CPA if you have questions about whether any of these transactions is potentially taxable.
What can I do about these taxes?
Unfortunately, this is not a new tax, and it cannot be avoided. The IRS’s intention is to better track unclaimed income that has often gone through the economy without finding its way on to a 1040 or business tax return.
While Venmo was the first to send copies of 1099-K’s, other payment platforms, including PayPal, Square, and Stripe, must now follow the same rules. Regardless of whether you receive a 1099-K, it is your responsibility to report the money you earn.
What can I do to make sure my income is reported accurately?
Be sure to not get a tax form for transactions that do not count by monitoring any transactions tagged as “goods and services.” Review your statements, as payment processors could mistakenly label something you did as falling into this category. If this has happened, be sure to contact Venmo to correct the mistake. And be sure to remember, if you sold an item for less than what you bought it for, you could report the loss when you file your return. Keep records and be ready to prove the item was sold for a loss.
Taxpayers have always been responsible and required to report income and profits whether you are starting a small business, or your kids are starting a side hustle. This new reporting only helps to formalize that process, particularly for those that have not been reporting income accurately. If you have any questions, don’t hesitate to contact an advisor here at Financial Alternatives.
Marcelle joined Financial Alternatives in 2024 as a Financial Planning Analyst. She assists senior advisors with the financial planning process for clients. A recent graduate with a BS in Finance from San Diego State University, Marcelle will soon begin her education requirements to sit for the CERTIFIED FINANCIAL PLANNER® exam.
Sources
IRS. 21 November, 2023. IRS announces delay in Form 1099-K reporting threshold for third party platform payments in 2023; plans for a threshold of $5,000 for 2024 to phase in implementation. https://www.irs.gov/newsroom/irs-announces-delay-in-form-1099-k-reporting-threshold-for-third-party-platform-payments-in-2023-plans-for-a-threshold-of-5000-for-2024-to-phase-in-implementation
Disclaimers
This information is not intended to be construed as tax advice. Consult your specific tax situations to a tax professional