The IRS is cracking down on payments made through Peer to Peer (P2P) apps like Venmo, CashApp and others. As a matter of fact, a recent report prepared by the Treasury Inspector General For Tax Administration(TIGTA) in April 2021 outlined how technology presents tax compliance challenges. It stated that payments are not always reported and can be hard to detect.
Further information from the report shows that TIGTA selected eight P2P payment applications and discovered that they did not meet the definition of a 3rd party settlement organization, such as a merchant account company. Therefore, they are normally not required to file Form 1099-K. However, the report also stated that three P2P companies did report transactions and together they filed more than 950,000 1099-K forms involving $198.6 billion in payments in Tax Year 2017. The IRS also identified that 169, 711 taxpayers did not report a combined $29 billion in payments received per the 1099-K Form issued to them by those three P2P payment companies.
To minimize under-reporting, all P2P payment application companies will now report a 1099-K on any cumulative transactions for each customer receiving $600 or more in cumulative payments starting the year 2022. This is very important information for all small businesses and especially for those who have side-hustles and have not been reporting those smaller transactions.
Many people with side-hustles don’t actually think they’re in business or that they make so little that they shouldn’t have to report at all and many don’t. But the IRS regulation on when to report self-employment income is clear. It states:
“You have to file an income tax return if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 and 1040-SR instructions.”
So, the bottom line is if you’re making money from your side-hustle, part-time or full-time business, you need to discuss what’s taxable and ways to take advantage of all possible tax deductions with your accountant or tax preparer.
Below are 5 ways to better prepare for reporting your taxes:
1) Have a bookkeeping system in place no matter how little money you bring in. Online DIY services such as Quickbooks make it easy to do this.
2) Meet with your accountant or tax specialist quarterly. If you don’t have an accountant or tax specialist, ask for referrals from other business acquaintances or call your local chamber for referrals. Also going on YouTube to see what tax professionals are really into educating others about taxes is helpful as well. Remember to meet with at least 3 and also ask for references before making your final selection.
3) Snapshot a picture of your receipts with your smartphone and save in a Google Drive or hard drive folder entitled, “receipts_20_” (fill in the relevant year). You might also want to create a master folder simply named, “receipts” and then a sub-folder for each year.
4) Use the same credit card for all business transactions/expenses so you can have an accurate accounting of all payables. Your monthly statements will provide you with a good record, which can often be imported into your bookkeeping system as well.
5) Each month export all receivable transactions from your credit card merchant, payment settlement companies and your checking to ensure your gross income is accurate for the year. Import into your bookkeeping system as well.
For more information on self-employment and IRS regulations visit the IRS Self-Employment Tax Center.
About the Writer:
Trina Newby is founder of Women About Biz and a Small Business Consultant and Success Coach. Ready to start or grow your business? Click here to schedule a FREE PowerTalk Coaching Session Today!