Venmo, PayPal, Etsy, and Other Sites Now Required to Report Income to the IRS

A new day is dawning for online sellers and individuals who collect transactions and fees through third-party payment processors. Beginning January 1, 2022, all third-party payment processors in the United States are required to report payments received for goods and services of more than $600 a year. This means if you’ve sold goods or conducted a business service and collected payment through Venmo, PayPal, Cash App, Square, Stripe, Etsy, or eBay, you will receive a 1099-K Payment Card and Third-Party Network Transactions Form, and that income will be reported to the Internal Revenue Service (IRS).

This new law was buried in the American Rescue Plan Act of 2021 and primarily affects gig workers, independent contractors, and entrepreneurs with a side hustle. In the past, companies were only required to send an IRS Form 1099-K for gross payments exceeding $20,000 and more than 200 transactions within a calendar year. This changes that landscape dramatically.

The new law only applies to sellers who made money from goods or services. Even those individuals who periodically decide to empty their closets and sell their clothes on eBay will now be issued a 1099-K if the profits exceed $600 within a calendar year. The new law does NOT, however, apply to transactions among friends and family, such as when you send your friend $20 via Venmo to cover the cost of splitting a pizza.

The Tax Implications

The IRS already requires businesses to report income paid to independent contractors or gig workers of more than $600. This had previously been done via the Form 1099-MISC. This new law broadens that responsibility to the tech companies that own the payment gateways (e.g., Venmo, PayPal) that the gig worker uses to collect money through the app.

This change will likely create more need for record-keeping by those using the payment services, especially if they use apps like Venmo and PayPal for personal (e.g., friends/family transactions) as well.

Also, be aware of the audit risk associated with the new reporting requirements. Every time the U.S. Treasury has large reporting changes such as this or cryptocurrency, there will be audits opened surrounding these reported tax transactions. Further, many of these transaction sites now also process cryptocurrency selling, buying, transferring, and holding of funds transactions, which creates a new avenue. When conducting an audit, the IRS can request all aspects of these accounts and can summons the records should you not comply.

The Tech Industry Response

The tech companies behind the payment apps and transaction sites are not happy about this new law. They are coming out in force against the prospect of collecting tax ID numbers for millions of clients, as well as the prospect of serving as enforcers against non-compliant customers. The idea of these companies collecting tax ID numbers—most likely Social Security Numbers (SSNs) for individuals—is a frightening prospect given the frequency of cyber data breaches.

Etsy, eBay, and five other companies have created the Coalition for 1099-K Fairness to combat these new rules as well as to come together to protect online sellers and small businesses from unfair tax and privacy burdens that they were not previously tasked with handling in a business capacity.

One of the more popular money transfer services of late, Zelle, is not affected by the new tax law. According to Early Warning Services, LLC (the network operator of Zelle), Zelle facilitates messaging between financial institutions but does not hold accounts or handle settlement of funds, which does not make them an institution that holds SSNs and Employer Identification Numbers (EINs) for individuals and businesses conducting business related to goods and services.