Independent contractors who accept payments via payment apps such as Venmo and PayPal are facing a new reality in 2022.
The IRS announced that they will require the payment apps to issue a 1099 to those businesses’ accounts that receive payments of $600 or more during the year. This is a change that will affect small businesses and independent contractors who are transacting business on these platforms. Current law already requires businesses to report payments of $600 or more to independent contractors to generate a 1099 for tax reporting services.
Don’t be concerned if you are only using these apps for personal purposes. You are not going to have to generate a 1099 for your friends who have transferred money to you for sharing a cab, splitting a dinner bill, or paying them back for picking you up something. This new IRS requirement will not affect personal accounts and transactions between individuals.
How to Prepare
To be prepared for this new reality there are things that you should be doing to ensure proper reporting and taxation. Many of the things we will discuss are important for anyone operating a business or even a side gig, just good habits.
One of the most important things a business or someone who has a side gig should be doing is keeping their personal assets and transactions separate from that of the business. Make sure you separate your personal and business accounts with the payment apps too, this is no different. Using your business account for your personal transactions will cause you to receive a 1099 for a much larger amount than you should of because the personal transactions do not need to be reported. Keeping things separate will stop this from happening.
Make sure you keep track of any expenses associated with the work you are billing. There may be expenses you are incurring towards the final product or work you are providing to your customer. These expenses can be deducted from the revenue you have been paid and received a 1099 for, but it is hard to use if you do not have accurate records.
Accurate records are not only important for tracking revenue and expenses, but you also want to make sure you are not counting revenue for the same project twice. As an example, if you provide a product or a service to a business that pays you through a payment app there is a high likelihood that you will receive a 1099 from both the payment app and the business that purchased your services. Without the proper records that revenue could then be recorded twice, causing you to pay more in taxes than needed.
We would be happy to schedule a time to discuss how we can help you and your family understand how this change might affect your business or side hustle. Feel free to schedule a 30 Minute Zoom Meeting for us to discuss what may be right for you.
This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice. Investing involves risk, including possible loss of principal. No strategy assures success or protects against loss. To determine what may be appropriate for you, consult your financial advisor.
