How to avoid tax problems from payment apps like Venmo, PayPal
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Taxpayers using peer-to-peer payment apps like Venmo and PayPal, and e-commerce companies like eBay, Etsy, and Poshmark, may get a new tax form next year — one that’s worth some advance planning.
Starting this tax year, such companies will have to apply a new, lower threshold when issuing tax forms to individuals conducting business transactions through these platforms. The 2023 tax year threshold is just $600 for a single transfer, compared to more than 200 transactions totaling over $20,000.
Because of the 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 originally slated to go into effect for the 2022 taxes. Some lawmakers are push for an increase the reporting threshold, so it could change further.
Regardless of the tax reporting threshold, however, it’s important to remember that P2P business payments have always been taxable, experts say. Here are some additional tips to keep in mind before the January report change.
Start saving for taxes or payments
First, it’s important to learn more about how the 1099-K reporting change may affect you, according to Tommy Lucas, certified financial planner and agent of record with Moisand Fitzgerald Tamayo in Orlando, Fla.
Lucas said on the IRS FAQ book page provides a good overview of possible scenarios that taxpayers may encounter and how these payments are accounted for on the tax return.
“It’s just about really understanding where the income is coming from,” he said.
Personal P2P payments between friends and family are still not taxable according to the IRS.
And if you anticipate owing money, it’s “absolutely wise to put money aside or make quarterly estimated tax payments because you may not be withholding enough from your paycheck at work,” Lucas explained.
Record keeping is an ‘absolute necessity’
If you’re accepting business payments through P2P apps, it’s important to set up an accounting or bookkeeping system as soon as possible, and it’s best to separate business payments from personal payments, said Jim Guarino, certified financial planner and chief executive officer at Baker Newman Noyes in Woburn, Massachusetts. In addition, he is a certified public accountant.
“This will be an absolute necessity for filing your 2023 tax return,” Guarino said, noting that there could be “discrepancies” between the reported gross proceeds on the 1099-K and your actual income.
An accounting system could also make it easier to track business expenses that could be deducted to reduce taxable income, Guarino said.
Stay organized with P2P payments for teens
when you are teenager Accepting P2P payments for a side hustle or summer job, that income may be taxable, experts say.
According to Adam Markowitz, a registered agent and vice president at Luminary Tax Advisors in Windermere, Fla., many parents are unaware that teens are required to report this income at tax time.
Bookkeeping doesn’t have to be difficult, especially when it comes to something as small as that summer job your child will be doing for eight weeks.
Adam Markowitz
Vice President at Luminary Tax Advisors
“I can’t count the number of times I’ve had to deal with this,” he said. “And the 1099-K situation is going to make that even more difficult.”
Markowitz urges families to keep an Excel file detailing income and possible business expenses, as well as receipts that can be deducted for tax reduction. “Accounting doesn’t have to be difficult, especially when it comes to something as small as that summer job your child will be doing for eight weeks,” he added.
https://www.cnbc.com/2023/05/23/how-to-avoid-tax-issues-from-payment-apps-like-venmo-paypal-for-2023.html How to avoid tax problems from payment apps like Venmo, PayPal
