There have been many changes in the workplace these last few years. Further changes occur during an economic climate like the one we live in now. This can result in many of us choosing to have “side hustles” or another way to gain income, such as a second or third job. You may have chosen to collect payments through a third party, such as Paypal or Venmo.
The idea is appealing for many reasons. You can use this “side hustle” income to bolster your savings account, get yourself out of a job you dislike, pay off debt, and more. But what about the tax implications? We will discuss further in this article what using these payment modules can mean for you when it comes time to do your taxes for the year.
What are the Benefits of Using Paypal or Venmo?
It can be incredibly appealing to use a payment module such as Venmo and Paypal in this day and age. Due to the versatility, ease of use, and nearly instant exchange of funds, receiving payments has come a long way from the days of placing a check in the mail or even processing a credit card payment.
Some insights are now offered with payment modules that can help with marketing, help with shipping, and even invoicing. Paypal also provides options for business capital or business loans. Typically, a fee per transaction or monthly fee applies to the consumer to utilize their services.
Using these payment apps to collect half of the grocery or restaurant bill, you generally don’t need to worry about taxes for funds received. You will, however, need to report your income to the IRS if you receive payments for goods or services on a payment app.
One way to avoid confusion is to set up a separate business account to help you to track your income from goods or services vs. personal use.
When Do I Need to Report Income from Paypal or Venmo?
As laws change regularly for tax reporting purposes, it’s best to consult an experienced attorney or tax professional that can provide invaluable guidance.
The best practice is to ensure that you have thorough documentation of the income and expenses of your small business or side hustle. Generally speaking, if you have surpassed the threshold of a certain amount of income received for goods and services within a year, you will need to report it to the IRS as income.
What is a 1099-K?
The form 1099-K, or Payment Card and Third-Party Network Transactions form, is used by the IRS to report payments received from third-party payment modules such as Venmo and Paypal. You should receive this form by the end of January if you have income from the previous year that exceeds that year’s payment threshold.
The form will include the gross amount of reportable payments received from each payment module. Meaning if you use both Venmo and Paypal, you will receive a 1099-K from each of them. The gross amount is reported, meaning any discounts, refunds, fees, and more aren’t factored in. That is up to the consumer to adjust.
It is helpful to ensure that the reported income matches your records and that you have accurate documentation of your expenses associated with your side hustle to avoid unnecessary taxes. Over-paying taxes can occur if some of the reported income included on your 1099-K is for personal payments received. This is another reason to consider having a separate business account on any third-party payment platform.
How Does the American Rescue Plan Act Affect 1099-K Reporting?
Before passing the American Rescue Plan Act in 2021, the threshold for reporting was $20,000 in payments and 200 transactions. This made the levels of necessary reporting much higher, and fewer consumers found the need to report their income by staying under the taxable threshold.
The American Rescue Plan Act changed that threshold considerably, lowering it to $600, regardless of the number of transactions. This means that consumers who have received more than $600 in any given year for goods and services will need to report their income accurately.
As already mentioned, having accurate documentation can be incredibly beneficial to the consumer. If you have expenses that coincide with the income received, it can help you to avoid overpaying when it comes time to do your taxes.
How Can an Attorney Help Me?
As with everything related to taxes, it’s better to be safe than sorry. It is much easier to be proactive in documenting your income sources and adequately reporting them than working backward to prove why you don’t owe what the IRS says you may owe for any given year. Do you have further questions about what effect your side hustles or secondary income will have on your taxes? Do you see inaccuracies on your 1099-K? You may need clarification or to ease your mind about the upcoming tax season.
An experienced attorney can become a fierce advocate for you, ensure that you have taken all the necessary steps to avoid an audit, help ensure that you are within the tax laws each year, and avoid complications with the IRS. If you’ve ever experienced an audit or know someone who has, you are familiar with the nightmare an audit or IRS issue can cause. Plan ahead, ensure your documentation is accurate and thorough, and utilize the help of an experienced attorney as necessary.
Contact our office at (786) 522-0410 to get your specific questions answered and learn more about how we can best assist you.