December 9th, 2022
TOPIC: IRS New Tax Law
This guide will educate you on the IRS’s new $600 reporting requirement. If you use third-party payment apps like PayPal or Venmo, keep reading!
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What Is This New $600 Law?
This new law forces Americans to report payments they received over online third-party payment apps (PayPal, Venmo, Cashapp, etc.) exceeding $600.
For example, say you’re selling stuff from your garage on eBay, and you got $700 paid via Paypal. If that’s the case, you must report that income to the IRS.
What Apps Are Affected By This New Tax Law?
This new rule applies to nearly all online third-party payment apps. Here is a list of apps we know so far:
- Paypal
- Cash App
- Venmo
- Skrill
- Stripe
- Square
- Melio Payments
- Payoneer
- Shopify Payments
- QuickBooks Payments
- Google Pay
What Are Some Workarounds To Bypass This New Tax Law?
This new rule only applies to goods and services transactions. That means money received from friends and family as a gift is not taxable.
Also, if you sell something at a loss, you don’t have to pay taxes on the money you receive.
For example, say you sold a computer for $500 but bought one for $1000 the day before. That’s a $500 loss and isn’t taxable.
Also, the IRS does not require you to report your income if you use online payment apps like Chase’s QuickPay because they are tied to your bank account.
Why Is This a New Tax Rule?
To crack down on large corporations evading taxes, the democratic party passed a law that decreases the threshold for reporting third-party transactions.
Before this new rule was passed, the previous law only required Americans to report their income if they received 200 payments for the year and the transactions exceeded $20,000.
How Do I Report My Payments?
When you receive $600 or more via these third-party apps, you should automatically receive Form 1099-K to report your payment.
Form 1099-K should come by the latest January 31st, 2023. This form is used to report payments received by a business or individual in the calendar year to the IRS.
Why Are So Many Americans Upset With This New Tax Law?
Even though this law is supposed to target big businesses, it will also end up targeting small businesses, family households, and individuals.
The kind of people affected by this bill include:
- Americans who are selling little things they own online through apps like eBay to help pay rent.
- Your next-door neighbors are having a garage sale to help put food on the table.
- College students are trying to sell their belongings online to afford textbooks.
- Barbers and anyone else who is self-employed and uses third-party payment apps.
EBay has paid $120,000 in the third quarter lobbying to raise the threshold.
They believe this new law will end up hurting the platform because it discourages individuals from selling used items to get extra cash.
Mary Fallon, the co-founder of Kidizen, a resale marketplace for kids’ clothing, said she’s worried this new law will scare and confuse sellers on her platform.
She said many of the sellers using Kidizen wouldn’t qualify to pay taxes on their transactions.
Either way, this new law is an extra layer of tax that millions of Americans didn’t have to worry about paying until now.
Is There Anyway to Overturn This New Tax Law?
The Republican party is trying to pass a bill that returns the reporting threshold back to $20,000 (the law before it was changed). They call this bill “Stop the Nosy Obsession with Online Payments Act of 2022“.
Meanwhile, the democratic party is considering passing a bill that increases the threshold to $5000 instead of $600. This bill is called the “Cut Red Tape For Online Sales Act.”
Right now, this bill by the democratic party has been introduced but hasn’t passed the house.
If congress does not change this law by the end of next week (12/16/22), it will be too late.
That’s because congress goes back on vacation, and Americans will be stuck with this new tax rule this upcoming tax season.
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