What You Need to Know About Payment Apps Reporting Business Transactions
Junior Accountant
If you’ve ever accepted payment for your goods or services through platforms like Cash App, PayPal, or Venmo, you’ve likely heard a lot of speculation about payment apps reporting transactions to the IRS. But what does this mean for you as a small business, entrepreneur, freelance or gig worker? Here's a breakdown of how this affects your responsibilities, when your transactions will be reported to the IRS, what you will receive, and what steps you should take if you receive a Form 1099-K.
What Does it Mean for Me That Payment Apps are Reporting my Transactions?
First, let’s clear up a common misconception: these payment platforms are only required to report transactions that involve payments received for goods or services. If you’re simply transferring money to your family and friends, that won't be reported. However, if you're selling products or services through these platforms or accepting payments for goods and services through these platforms, they may need to report your earnings to the IRS.
The good news is that you don’t have to file anything extra yourself! The payment apps, or third-party settlement organizations (TPSOs), are the entities with new reporting obligations. If your payments received exceed certain thresholds, you will receive a Form 1099-K. This form reports the total amount of income you’ve received through the app during the year and is submitted to the IRS on your behalf.
What are the Thresholds for Receiving a 1099-K from a Payment App?
The IRS has set specific thresholds for when payment apps, such as Cash App, PayPal, or Venmo, must report your transactions. On November 26, 2024 IRS Notice 2024-85 updated the reporting thresholds. It’s essential to understand what applies to you:
2024: If you receive over $5,000 in payments, regardless of the number of transactions, you will receive a Form 1099-K.
2025: The threshold drops to $2,500 in aggregate payments, with no minimum number of transactions.
2026 and after: The threshold will further decrease to $600, again with no minimum number of transactions.
This means that if the total amount of payments you received exceed these limits in the respective years, you can expect to receive no later than January 31st of the following year, a 1099-K from the payment app you’ve used. Keep in mind that even if you have only a few large transactions totaling over the respective threshold, you will receive a form 1099-K.
What Should I Do If I Receive a 1099-K for my Business?
If you receive a Form 1099-K from a payment app, treat it like you would any other income-related form, such as a 1099-MISC. Here’s some common next steps:
1. Turn in the 1099-Ks from payment apps to your accountant along with the rest of your tax documents. Your accountant will use the information to calculate your taxable income for the year.
2. Report the income as part of your small business’ gross income on your tax return.
The total amount shown on the 1099-K will need to be included as income for your business.
3. Be careful not to double-report your income. It may help to keep any income from payment apps separated from income from other sources (i.e., cash or check). If you do not choose to keep the income sources separated, make your accountant aware of this. Double-reporting income could result in paying more taxes than necessary.
Key Takeaway
While the new reporting requirements may seem overwhelming, it’s important to stay up-to-date and keep good, detailed records. While payment apps like PayPal, Cash App, and Venmo have had to report payments for goods and services to the IRS at high dollar amounts and large volumes of transactions, they must now report payments at increasingly lower thresholds regardless of number of transactions. The simple steps outlined above, will help you stay compliant with tax laws and avoid any surprises when tax season rolls around. If you’re unsure, don’t hesitate to contact your accountant for guidance on handling your 1099-K and other tax documents.