Online sales boomed during the pandemic, and the government took note. A lot of micro businesses have depended on third-party apps like Venmo and Cash App this entire time. This seems like a good solution, but only for the short term. If your side hustle, micro business, hobby selling, or reselling business will make digital transactions totaling $600 or more this year through these apps, it will need to be reported to the IRS. This new rule went into effect beginning January 1, 2022. This means you will need to monitor your income this year to report it in 2023.
What Does This Mean for Your Micro Business?
The rule is mostly affecting the way third-party apps like Venmo and Cash App behave. Essentially, they are now required to give you a 1099-K form. The form will report the total gross income you received during the year without any consideration of losses (adjustments, discounts, or refunds). You will need to have a system to track any dollar amount reported that comes at a loss.
These third-party apps may also collect more tax information from you like your SSN, ITIN, or EIN. The rule only applies to payment apps that work peer-to-peer, where a person sends the money and a person receives the money. If you plan on continuing to grow your business, it's a good time to establish a bookkeeping system or hire an accountant. If you need help getting started with this process - join one of our upcoming low-cost tax & bookkeeping coaching sessions.
What If I Receive Other Non-Business Payments?
Digital transactions that come at a loss to you, this could be excluded from your income reporting. This is considered 'nontaxable income'. This can include: rent payments, gifts, money from friends after splitting a check, or reselling items at a loss. What is important is that you keep good records of your taxable vs. nontaxable income.
Last Piece of Advice from a Tax Professional
We asked Lily Tran of TaxUSign to chime in on this new rule and share some advice. Here's a summary of what she said:
The baseline is that any time you sell goods or services for a profit - that is taxable income. If you believe your activity is for hobby and not for business profit, consider checking out the IRS rules around hobby side income. Maybe you've been selling at a loss this whole time, and that is not taxable income. Either way, you need to track these transactions.
"Start on the IRS website Q&A section, search for tax professionals in your area, some of which offer free consultations, and lean into the free resources available to you." Lily noted.
Ultimately, everyone's situation is unique. Finding a tax professional to directly support you could be the best option. This could also be the most valuable investment for your future business growth.
Join a free upcoming tax session as part of our Grow with a Pro series to hear more from Lily Tran of TaxUSign.
Follow Lily on social media @lilytrantax or @taxusign to get more tax tips and hear about upcoming events she will be hosting.
