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Taxpayers who use peer-to-peer payment apps like Venmo and PayPal, and e-commerce companies like eBay, Etsy, and Poshmark may receive their new tax form next year — one that’s worth some advance planning.
Starting this tax year, these companies must use a new lower bound when issuing tax forms to individuals who conduct business transactions through those platforms. The minimum tax for 2023 is just $600 for a single transfer, which is less than more than 200 transactions totaling more than $20,000.
As a result of this change, more taxpayers are likely to receive Form 1099-K, which reports third-party business payments to the IRS.
The IRS delayed the controversial change, which was supposed to go into effect in 2022 taxes. Some lawmakers are pushing to increase the reporting limit, so it can change more.
However, regardless of your tax reporting threshold, it’s important to remember that P2P business payments have always been taxable, experts say. Here are some additional tips to consider before changing your reporting in January.
Start saving for taxes or making payments
First, it’s important to learn more about how changing your 1099-K reporting will affect you, according to Tommy Lucas, a certified financial planner and registered agent with Moisand Fitzgerald Tamayo in Orlando, Florida.
Lucas said the IRS’s Frequently Asked Questions page provides a good overview of potential scenarios taxpayers may encounter and how to report these payments on returns.
“It’s just a real understanding of where the income is coming from,” he said.
According to the IRS, personal P2P payments between friends and family are still not taxable.
Lucas explained that if you expect to owe money, setting aside money or making quarterly tax payments is “quite smart,” since you may not be withholding enough from your paycheck at work.
Record keeping is an ‘absolute must’
If you’re accepting business payments via P2P apps, it’s critical to put in place an accounting or bookkeeping system as soon as possible, and it’s even better to separate business from personal payments, said Jim Guarino, certified financial planner and managing director at Baker Newman Noyes in Woburn, Massachusetts. He is also a Certified Public Accountant.
“This will become an absolute necessity for 2023 tax return preparation,” Guarino said, noting that there may be “discrepancies” between total returns reported on Form 1099-K and your actual income.
An accounting system may also make it easier to track business expenses, which may be deducted to reduce taxable income, Guarino said.
Stay organized with P2P Teen Payments
If your teen accepts P2P payments for a side job or summer job, that income may be taxable, experts say.
Many parents don’t realize that teens need to report this income at tax time, according to Adam Markowitz, registered agent and vice president at Luminary Tax Advisors in Windermere, Florida.
“I can’t even count the number of times I’ve had to deal with that,” he said. “And the 1099-K status will make that even more difficult.”
Markowitz urges families to keep an Excel file detailing income received and potential business expenses, with receipts, that may be withheld to reduce taxes. “Accounting doesn’t have to be difficult, especially when you’re talking about something as small as the summer job your child will be doing for eight weeks,” he added.