True or false: The federal government is tracking payments to friends and family over $600
The deadline for filing 2021 taxes is coming up. Tax Day falls on Monday, April 18, 2022. Is your paperwork in order?
Tax deductions are not always clear-cut. You may miss an opportunity to reduce the amount of money you need to send to Uncle Sam. We went ahead and put together eight tax deductions to get you started. Tap or click here to check out our list. And there might be changes that impact you this year.
The 2021 American Rescue Plan is a response to the COVID-19 pandemic. It contains provisions to restore the economy and fight the virus directly. It also contains a provision for third-party payment processors. Keep reading to find out how this impacts your taxes.
Here’s the backstory
The American Rescue Plan aims to deliver relief to American workers and help lift children out of poverty, among other goals. It includes a national plan to make it easier for people to get tested, treated and vaccinated for COVID.
It includes relief payments, extended unemployment benefits and increased Earned Income Tax Credit for frontline workers. You can learn more about the program at whitehouse.gov/american-rescue-plan.
Do you run a business where you accept payment from apps like PayPal, Cash App, Venmo or Zelle? Then you may be affected by a new provision introduced with the American Rescue Plan.
Form 1099-K gets an update
IRS Form 1099-K was introduced years ago for online retailers who deal with payment card transactions to report sales for tax purposes. It requires credit card companies and third-party processors to report payment transactions they processed for anyone who used their services.
Up to the end of 2021, if you earned more than $20,000 through these payments (which can include sales, goods and services, contracts, and more) and conducted more than 200 transactions, you would get a 1099-K and have to report it.
Starting Jan. 1, 2022, if you earned more than $600 per year through a third-party payment processor, you may receive a 1099-K next year and have to report those 2022 earnings. It doesn’t matter how many transactions you completed.
This may sound scary to freelancers, independent contractors and online sellers but don’t panic. This is a change in how you report your earnings, not necessarily how much you’ll pay. You’ll be reporting your income regardless.
What about that time you split the dinner bill?
The tax reporting change does not affect every transaction you complete through a third-party payment service. If you send money as a gift or use an app to split a restaurant bill, you don’t have to report it.
So there is a misconception among many people. Let’s clear it up. No, the IRS isn’t taxing personal transactions between family and friends. Additionally, if you sell an item at a personal loss, it will be excluded from the new legislation.
PayPal put out a press release to help you understand how the changes will impact you. It also explains the difference between peer-to-peer (P2P) and goods and services transactions.
Regardless of which third-party payment processor you use, you may be asked by the company to provide information, including your Employer Identification Number (EIN), Individual Tax ID Number (ITIN) or Social Security Number (SSN).
Speak to a tax professional for more information.
Keep reading
Check the mail for this letter about your final IRS stimulus payment
How to get four free at-home COVID tests from the US government
Tags: apps, Earned Income Tax Credit, freelancers, online sellers, pandemic, PayPal, security, stimulus payment, tax, Tax Day, tax deductions, taxes
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