3 Top Tips – Handling IRS $600 Venmo-CashApp Rule
For most of us, $600 is not a life-changing amount of money. But, now, with IRS’s new rule – it could be.
As of January 1st, 2022, if you receive more than $600 from payment apps such as Venmo, CashApp, or Zelle, it will be reported to the IRS.
A Reporting Change – NOT a Tax Change
A big distinction that everyone needs to understand is that this is not a tax change. It’s a reporting change.
The reason why that distinction is so important is that while those payment processors now must report any amount received over $600, it doesn’t automatically mean that it is reported as income or that you will be taxed on it.
It will be reported only as “payments from 3rd parties.”
If you are not using those apps for business purposes, there will be an opportunity on next year’s tax return to specify that the cash you received was not business income.
Many of us use those apps for strictly personal reasons, and you WILL have the opportunity to say that. In that case, that money you took in will not be treated as taxable income.
What This Means for Business Owners
The new rule will be a significant change for business owners, gig workers, and the self-employed who use those applications for business purposes.
Previously, the IRS only had to be notified of payments totaling more than $20,000.
Now they will see anything over $600. In other words, your entire business operation is exposed to the IRS.
How Can Business Owners Protect Themselves?
1. If you receive business income through 3rd party payment apps, make sure that the money is deposited into a business-only bank account.
Do not let that money mix with your other personal funds.
This will also help you keep better records in case you become the target of an IRS audit.
2. Be sure that all of your business-related expenses run through that same account.
For example, paying business rent, your business phone bill, transportation costs – be sure all of that is done from the same account that your 3rd party payment app money is now deposited.
3. When you file your tax return for 2022, use that account to come up with your profit and loss.
Remember, your business is now going to be exposed either way.
You may as well get credit for your cost of doing business when you file your tax return.
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