You are currently viewing Making money on Paypal or Cash App? This new IRS reporting rule could impact millions – CNET

Making money on Paypal or Cash App? This new IRS reporting rule could impact millions – CNET

The rule applies if you earn business income via third party payment apps during 2022.
If you’re self-employed or have a side hustle and get paid through digital apps like PayPal, Cash App or Venmo, any earnings over $600 will now have to be reported to the IRS. A provision from the 2021 American Rescue Plan, which went into effect on Jan. 1, directs third-party payment processors to report transactions received for goods or services totaling over $600 per year to the IRS. 
Prior to this legislation, a third-party payment platform would only report to the tax agency if a user had more than 200 commercial transactions and made more than $20,000 in payments over the course of a year. 
This new law won’t apply to your 2021 taxes, which you’ll file this tax season. But it will apply to the earnings you make throughout 2022, which you’ll report when you file in 2023. 
There’s a lot of talk online about this new tax reporting requirement and if you earn money through a digital payment app, you may be confused about what’s true and what isn’t. Let’s separate the fact from the fiction.
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If you’re self-employed, you should already be paying taxes on your total income, regardless of how you receive your payments for goods and services. The new legislation is not a tax change — it’s a tax reporting change so the IRS can keep tabs on the transactions made through payment apps that often go unreported. 
Going forward, third-party payment companies will issue you a 1099-K tax form each year if you earn $600 or more annually in income for goods or services. This tax form might include taxable and nontaxable transactions, particularly if the account is for both business and personal use. 
The IRS will also receive a copy of the tax form and won’t be relying purely on self-reporting. “The IRS will be able to cross-reference both our report and yours,” Paypal noted in a November 2021 statement.
To make managing your business finances easier, we recommend creating separate PayPal, Zelle, Cash App or Venmo accounts just for your professional finances.
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Rumors have circulated that the IRS was cracking down on money sent through third-party payment apps to family and friends, but that isn’t true. Personal transactions involving gifts, favors or reimbursements are not considered taxable. Some examples of nontaxable transactions include: 
Now that this new law is in effect, payment apps like PayPal may be reaching out to you to confirm tax information, such as your employer identification number, individual tax identification number or Social Security number. If you own a business, you most likely have an EIN, but if you’re a sole proprietor or individual freelance or gig worker, you’ll provide an ITIN or Social security number. 
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If you sell personal items for less than you paid for them and collect money via third-party payment apps, this new legislation won’t affect you. For example, if you buy a couch for your home for $500 and later sell it on Facebook Marketplace for $200, you won’t owe taxes on the sale. That’s because it’s a personal item you’ve sold at a loss. However, you may be required to show documentation of the original purchase to prove that you sold the item at a loss.
However, if you have a side hustle where you buy items and resell them for a profit via PayPal or another digital payment app, then earnings over $600 will be considered taxable and reported to the IRS. 
Make sure to keep a good record of your purchases and online transactions to avoid paying taxes on any nontaxable income — and when in doubt, contact a tax professional for help.
Read moreBest tax software for 2022: TurboTax, H&R Block, Jackson Hewitt and others compared
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