USE VENMO OR PAYPAL? LOOK OUT FOR THESE CHANGES

If you use a Third-Party Service Organization (TPSO) like Venmo, PayPal, or Zelle to send and receive money, there are some changes headed your way. These services are wildly popular. Venmo alone went from 23 million users in 2018 to 70 million in 2021. But TPSOs have created an income tracking problem for the IRS. They tried to fix the problem last year without much success. Here’s what happened, the proposed solution, and why you need to know if you use a TPSO for anything.

TPSOs, 1099s, and the IRS

Before 2022, the IRS only required TPSOs to issue a 1099-K if someone received more than $20,000 in a year and had more than 200 transactions on any platform. If someone sold the occasional item on eBay or used a TPSO for an online craft business, there was no good way for the IRS to track the income. In other words, it was easy to miss legitimate income reporting. So, when Congress passed the $1.9 trillion American Rescue Plan Act in 2021, they closed the loophole. Instead of the $20,000/200 transaction threshold, a 1099-K would be issued for anyone who got more than $600 cash through a TPSO. And there was no minimum transaction amount. The change was supposed to start in 2022, with 1099-Ks arriving in 2023.

The IRS TPSO change was delayed

The 2022 change didn’t happen. There was too much confusion surrounding who might get a tax hit unnecessarily. For example, if a parent sent their college student money via Venmo for school supplies, it might generate a 1099-K. Would that student be on the hook for the taxes? What if the money came from a tax-free account like a 529 Plan? So, the transition year moved to 2023 to give TPSOs and all other interested parties time to prepare and avoid mistakes. But in 2024, the 1099-Ks are scheduled to start rolling. Here’s what that means for you.

Stay alert in 2024

Starting this year, many platforms require you to use a taxpayer identification number or TIN. This is either your Social Security number or your Employer Identification Number. If you accept money and don’t provide a TIN, that platform withholds 24% of your payments over $600.

Where’s the money going? The IRS.

So, a non-taxable transaction could get taxed if you aren’t careful. Also, be on the watch for any unnecessary 1099-K issues in 2024. If you get one, follow the steps here.

The bottom line

The delay should give the IRS and TPSOs enough time to work out the kinks. But the process is new, and there are bound to be mistakes. Keep your eyes peeled so you don’t get taxed unnecessarily. And if you are a contractor who uses TPSO to take payment, the onus is on you to report all income.

As always, keep good records or enlist the help of a CPA to avoid problems next tax season.