Use Venmo or PayPal for Your Business? Big Changes Could Be Coming in 2024

The 2023 tax season is already off to a confusing start, with the IRS backtracking on guidance for many Venmo and PayPal users. This is just the latest controversy around an income reporting rule change from 2021. The Small Business Jobs Act could repeal that rule, and save millions of Americans from a headache in future tax years. Here's what you need to know.

The new rule

Although income reporting requirements might be new for some Venmo users, they have been around for years. However, pandemic-era legislation drastically reduced the IRS reporting threshold for income received from companies like PayPal and Venmo. The law subsequently handed down new tax requirements for millions of Americans and the payment processors they use often.

In past years, income earned through so-called third party settlement organizations, such as Venmo, PayPal, CashApp, and Zelle, was only reported to the IRS if a user received over $20,000 or made 200 transactions in a given year. The American Rescue Plan Act of 2021 altered reporting requirements to include anyone receiving over $600 from such payment processors. Such transactions must now be reported to the IRS, and recipients must receive tax form 1099-K for tax purposes.

However, the implementation of the new rule has been slow and confusing for taxpayers, payment processors, and the small businesses that use them. Since its passage in 2021, the rule has yet to be enforced, with the IRS currently planning a temporary reporting threshold of $5,000 for such transactions in 2024. The IRS announced only two weeks ago that the $600 reporting requirement would be delayed again in 2023 -- but not before some of an estimated 44 million 1099-Ks were distributed to taxpayers.

What to do now

The IRS may have decided against enforcement of the new rule in 2023, but that move may cause an even bigger headache for some taxpayers figuring their liability this coming April. The agency issued a press release in late November announcing its decision to delay enforcement with some additional guidance. If you or one of your workers receives a 1099-K for 2023 income, there are a few steps that should be taken.

While your 1099-K will show a single gross payment amount, that amount could include various types of income that are taxed in different ways. Some payments, like a birthday gift of cash or reimbursement from a split Uber ride, are personal payments that are not taxed. But if you sold personal property such as a used car, part or all of the income may be taxable as a gain.

Business Credit Card Comparison

Consider these business credit cards that offer a convenient and efficient way to separate personal and business expenses, simplifying accounting and tax reporting.

Additionally, business cards can provide valuable perks such as rewards points, cashback, and expense tracking tools, enhancing financial management and the potential to help save money in the long run.

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Income associated with providing a service, selling goods, or renting a property will likely be entirely taxable. Taxpayers should be aware that they are responsible for reporting income correctly and must also calculate applicable deductions such as fees and shipping costs. As a reminder, income earned through the sale of services and the sale or rent of property must always be reported, whether you receive a 1099-K or not.

The Small Business Jobs Act

House Republicans have recently rallied behind the Small Business Jobs Act, which includes a provision that would repeal the 2021 rule. The bill would restore the reporting threshold of single-year transactions to those totaling over $20,000. The proposal would further override the IRS transition period in 2024, and could eliminate 1099-K reporting for tens of millions of Americans.

The bill will likely find a broad base of support in the Republican majority of the House of Representatives. However, the bill would also require the support of a handful of Democrats in the Senate to ultimately land on President Joe Biden's desk. A rollback of the unpopular new reporting requirements could be appetizing for some moderate Democrats, and the proposal could find even more support if separated from other provisions of the bill.

The IRS recently announced that a new reporting requirement for online payments would not take full effect until 2025. For those who receive a 1099-K this tax season, however, there will likely be confusion around what should be counted as taxable income and what should be left out. The Small Business Jobs Act would eliminate the reporting requirement for some tens of millions of Americans, and could gain enough bipartisan support to become law. Until then, however, small business owners and the contractors they count on should discuss with a tax expert before filing a business tax return this April.