If you’re a business owner, you might use third-party payment processors like PayPal, Venmo, or CashApp for business transactions. If so, answer this question…
…are you doing it the right way, though?
Many business owners aren’t—either by accident out of ignorance or as a nice little “business savvy” shortcut to skirt past that 3% merchant services fee for goods and services. We get it. Money is money, right?
Well, we’re here to let you know that a new 1099-K tax reporting law for 2022 is about to end the party for business owners who use personal PayPal, Venmo or CashApp for business transactions (cue up “Closing Time” by Semisonic).
As you’ll see later on, it’s a party they never should have gone to in the first place… which they would have known if they came to Hill Bookkeeping & Consulting since we know all about small business owners and taxes.
What Is Form 1099-K?
Remember the economic crash in 2008? That year, the Housing and Economic Recovery Act introduced new criteria for credit card merchants and banks to more effectively track payments to freelance employees and contractors. Shocker: not enough people shared their earnings with the IRS. Enter Form 1099-K for third-party payment processors, which was introduced in 2012 for 2011 tax filing.
So, What Is This New 1099-K Tax Reporting Law for 2022?
Before this year, the IRS rules stated that any merchant services processor (portals that allow you to use a credit card or debit card for payment) must issue Form 1099-K to any client that had 200 transactions or more OR at least $20,000 in payments in a calendar year.
Effective January 1, 2022 (Happy New Year!), the IRS will require third-party merchants to report account holder payments of more than $600 total throughout the year, no matter how many transactions they processed. While this won’t impact your tax return for 2021, this will be on the table for your 2022 tax return that you’ll file in 2023.
The government will hold all payment processors to this standard. Why? It’s simple: the government wants business owners to start reporting P2P transactions and stop trying to avoid merchant processing fees.
What!? Why Are They Starting to Do This?
Ready for this truth bomb?
Not being allowed to use PERSONAL accounts for BUSINESS transactions has BEEN a thing. It’s not just some magic clause that some merchant-processor wizard materialized out of thin air yesterday. It’s a violation of PayPal and Venmo Terms of Services to use a PERSONAL account to conduct BUSINESS transactions. If they catch you doing BUSINESS on a PERSONAL account, they will confiscate your money and shut down your account.
To quote the Notorious B.I.G, “If you don’t know, now you know.”
(And, yes, we may be dating ourselves slightly with these music references.)
Ask yourself this question: is having your account shut down and your money confiscated worth skipping out on 3% in merchant services fees? Nope! It’s only 3%!
JUST PAY THE DAMN FEES!
With that said, if the 3% is really keeping you up at night, consider raising the prices on your services to make up the difference. You should be increasing your prices on an annual basis anyway, and if you’re not…well, we’ll tell you more about that in a later article. :)
What Else Should I Know?
Know that PayPal will automatically send you a 1099-K if you receive $600 or more in business payments to your PayPal Business account (yes BUSINESS account, not PERSONAL…stop reading and set one up now if you haven’t already).
Additionally, PayPal Friends and Family transactions are excluded from these considerations. While that doesn’t mean go all willy-nilly using a PayPal F&F to pay businesses, just make sure you send that vendor a 1099-NEC if you do. (We can help with this too! It’s a whole thing…don’t panic, we can walk you through it.)
With that said, these reporting laws will only apply to business transactions. For instance, let’s say you receive $600 from various people during the year to cover personal expenses, dinner and drinks. While the payment processors may report it, that doesn’t mean Uncle Sam will hit you with taxes.
While the new reporting law applies to gross income, there are some exclusions, including:
- Selling personal items at a loss
- Reimbursing someone
- Sending money as a gift (keep in mind: IRS gift thresholds may apply)
As always, when it comes to preparing to file taxes, you should always keep accurate records. While many of these online processors generate billing statements, it helps to stay on top of things yourself (AKA SAVE ALL DOCUMENTATION!). As with every tax obligation, you’ll want to report all transactions and make sure the income listed on the 1099-K matches your records.
The Bottom Line About “New” 1099-K Eligibility Requirements
Trust us: the new federal tax law and EXISTING POLICIES aren’t just bedtime stories that we tell our kids as scare tactics to enforce good behavior. They will take your money! We’ve seen it happen to a few business owners BEFORE these tax reporting laws were even widely discussed.
If you have a business and are accepting digital payments or payments via credit card, make sure you:
- Use an authorized third-party processor
- Make sure that if you do, it’s a BUSINESS account
- Seriously… a BUSINESS account, not PERSONAL
- Stop trying to dodge 3% merchant service fees… JUST PAY THEM! It’s a cost of doing business AND it’s a tax-deductible expense.
- Segregate business accounts from personal accounts
- Separate business transactions from personal transactions
- SAVE ALL DOCUMENTATION(!!!)
Need help with navigating these new tax reporting changes? Hill Bookkeeping & Consulting is ready to help. Schedule an intro call today!