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Unless you have a side hustle, your Venmo and Paypal transactions will likely not be taxed

Unless you have a side hustle, your Venmo and Paypal transactions will likely not be taxed

Any earnings over $600 will be reported to the IRS, according to a provision from the American Rescue Plan, which went into effect on January 1, 2017.

Before this legislation, a third-party payment platform would only report to the tax agency if a user had more than 200 commercial transactions and made more than $20,000 in payments over the course of a year.

This new law will not apply to your account during this tax season, but it will apply to your earnings you make throughout 2022, which you'll report when you file in 2023.

There's a lot of talk online about this new tax reporting requirement, but if you earn money through a digital payment app, you may be confused about what's true and what's not. Let's separate the fact from the fiction

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Fact: It's not a tax change, compared to a reporting change.

The new legislation is not a tax change, it's a tax reporting change, so the IRS can keep tabs on the transactions made through payment apps that often go unreported.

If you earn $600 or more annually in income for goods or services, third-party payment companies will issue a tax form each year. This tax form might include taxable and nontaxable transactions, particularly if the account is for both business and personal use.

The IRS will also receive a copy of the tax form, which will not be relying on self-reporting.

To simplify managing your business finances, we recommend creating separate PayPal, Zelle, Cash App, and Venmo accounts just for your professional expenses.

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Fiction: The IRS is counting money you send to friends and family.

Personal transactions involving gifts, favors, and reimbursements are not considered taxable.

  • Money received from a family member as a holiday or birthday gift
  • Money received from a friend covering their portion of a restaurant bill
  • Money received from your roommate or partner for their share of the rent and utilities

Fact: Payment apps may be requesting tax information from you.

Payment apps like PayPal may be reaching out to you to verify tax information, such as your employer identification number, or individual tax identification number, or Social Security number. If you're a sole proprietor or individual freelance or gig worker, you'll provide an ITIN or Social Security number.

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Personal items sold at a time will be taxed, according to fiction.

If you sell personal items for less than you paid for them and collect money via third-party payment apps, this new legislation will not affect you. For example, if you buy a couch for your home for $500 and later sell it on Facebook Marketplace for $200, you won't pay taxes on the sale. That's because it's a personal item you've sold at a loss. However, you may be required to show documentation of the original purchase to prove that you sold the item at a loss.

If you have a side hustle where you buy items and sell them for a profit via PayPal or another digital payment app, then earnings over $600 will be considered taxable and reported to the IRS.

To avoid paying taxes on any nontaxable income, keep an eye on a tax professional.

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