december2021 - 32

FEATURE
Getting Paid
By Venmo
or PayPal?
The IRS Will Know
By Ken Berry, J.D.
IF YOUR SMALL business receives payments from Venmo, PayPal or other
third-party networks, you could be in for a rude surprise next year. Under a
little-publicized provision in the American Rescue Plan Act (ARPA), providers
must begin reporting to the IRS business transactions totaling $600 or more,
just like most employers. This could create some unexpected hassles for
entrepreneurs who use one or more of these apps to conduct business.
The ARPA change takes effect on January
1, 2022. Third-party networks are gearing up
for the new responsibilities.
Previously, third-party providers faced
less daunting challenges. They only had to
send out 1099-K forms when an account had
200 or more business transactions during
the year totaling at least $20,000. The new
ARPA reporting requirement broadens the
application significantly.
Of course, this rule change doesn't
change the tax consequences for recipients.
If you receive payment for business services
or goods that you furnish, you're already
liable for federal income tax on that amount
regardless of whether you're paid in cash
or by check, credit card, app or some other
means. On the flip side, you're entitled to
claim deductions for your qualified business
expenses that can offset the tax that you owe.
ARPA aims to clamp down on business
people, particularly those operating in the
gig economy like Uber and Lyft drivers and
Airbnb landlords, who haven't been reporting
all of their taxable business income. But rest
assured it doesn't affect casual and personal
transactions made through one of the
third-party networks. For example, if you're
being reimbursed by friends for the tab at a
restaurant or for tickets to a sporting event or
concert, you're in the clear. This won't result
in any taxable income.
Nevertheless, the new reporting requirement
could lead to some tax complications.
Notably, the third-party network may
not be sure if a transaction is personal or for
business. If it issues a 1099 to you for a charge
in a gray area, it's up to you to prove that this
isn't a taxable event if the IRS imposes tax.
What's more, you might, and probably
32 DECEMBER 2021 ■ www.CPAPracticeAdvisor.com
will, receive some duplicate 1099s for the
same goods or services. This could occur, for
example, if you get a 1009-MISC or 1099-NEC
from a customer or client and a 1099-K from
the third-party provider. Again, the onus is
on you to establish the existence of just one
business transaction for the event.
What can you do about it? Not a whole
lot for now. Expect Venmo, PayPal and the
other the third-party networks to start asking
for more information to clarify the nature of
your transactions. (BTW: PayPal now owns
Venmo.) And they will be requesting your
vitals- such as an Employer Identification
Number (EIN), Individual Tax ID Number
(ITIN) or Social Security Number (SSN)-that
they will be sharing with the IRS.
One possible solution is to use separate
accounts for business and personal transactions.
That will give you more credibility
if the IRS ever comes calling. Bottom line:
Venmo and PayPal users won't be flying under
the radar any longer. ■
Ken Berry is a tax attorney and tax correspondent for
CPA Practice Advisor.
http://www.CPAPracticeAdvisor.com
december2021

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