Will you pay taxes on PayPal, Cash App transactions in 2023? It depends, tax experts say

Life doesn’t always give you lemons — sometimes it gives you a Lego to step on or a chocolate chip cookie that’s brimming with raisins. And for many people in 2023, life will bring a 1099-K form to ensure certain transactions on apps like PayPal, Venmo and Cash App are taxed appropriately.

This is due to the new tax reporting requirement put on third-party settlement organizations (TPSOs), such as PayPal and Cash App, as part of the American Rescue Plan Act that was signed into law in 2021. The law amended some sections of the Internal Revenue Code, requiring TPSOs to report goods and services transactions made by users with $600 or more in annual gross sales, regardless of the total number of transactions, on 1099-K forms. Previously, this form was only given to users who received more than $20,000 and 200 transactions from selling goods and services in one year.

The change went into practice on Jan. 1, effectively lowering the threshold for when TPSOs must report goods and services payments to its users.

Other companies that regularly dole out 1099-K forms to users that meet the IRS’s income threshold, such as Airbnb and Etsy, are also subject to the new rule. Some businesses, like DoorDash, already require users on their platform to report their income if it exceeds $600.

Most casual TPSO users will not be affected, even if they are using these applications to pay back a roommate for rent, split the cost of dinner or send gifts to relatives.

What determines who will get a 1099-K? Who qualifies?

When determining if you will receive a 1099-K, the key words are “goods and services.” Many TPSOs — such as PayPal and Venmo — and others — like Cash App — have separate accounts that allow users to identify which of their transactions are for goods and services. In these applications, only transactions labeled as such will be considered for the 1099-K form.

Those who receive over $600 in goods or services transactions, like payment for a birthday cake or haircut, through a third-party settlement organization, will get a 1099-K the following year.

People receiving payment for a good or service through a TPSO should have been reporting that income on their taxes all along. So, the form may not impact them drastically, besides identifying some receipts that may have inadvertently been omitted previously, according to Jim Brandenburg, a tax partner at accounting and professional services firm Sikich LLP.

It could make a significant difference to small business owners like Jeff Klemm, a local musician and music teacher who regularly uses PayPal and Venmo for his business and personal transactions. Klemm embarks on a week-long project each spring to determine which third-party settlement organization transactions from the previous year need to be reported to the IRS. He is curious to see if receiving a 1099-K from the TPSOs he uses will shorten his filing process significantly in 2023.

For Klemm and other businesses, keeping up with new tax laws and how they be affected by them can be exhausting.

“The whole purpose of these things, that I was under the understanding of, is to essentially eliminate cash and trips to the bank,” said Klemm. “For instance, Venmo, I use it for taking payments. I also use it for paying bills. I use it for sending money to friends for food. It serves as another extension of my bank account. It used to be sort of all encompassing, but now with these new laws it seems like it's getting more regulated.”

The misinformation surrounding the new tax reporting requirement has also had a negative impact on local buyers and sellers. Klemm recently tried to purchase a musical instrument from someone online, but the seller would not accept payment through any type of TPSO – citing the new rules these apps are under.

“Usually those transactions are cash anyways, but sometimes they're (through) Venmo,” said Klemm. “I asked him, ‘Do you take Venmo?’ and he said, ‘No, these new tax requirements basically shut me down as far as selling things online.’ So, I know that it's affecting the resale market a lot.”

What sellers may not know is that items sold at a loss cannot be taxed, regardless of their appearance on someone’s 1099-K. The same goes for reimbursements and personal gifts, which are generally not reportable on your tax return.

Another notable exception are exchanges made through Zelle, a well-known digital payments network that is not required to report its users’ transactions to the IRS.

“Payments between friends and family, and eligible small businesses sent through the Zelle Network are not subject to this law because Zelle facilitates messaging between financial institutions but does not hold accounts or handle settlement of funds,” Early Warning Services, LLC., the network provider of Zelle, said in a statement. “If payments received on the Zelle Network are taxable, it is the consumer or organization’s responsibility to report them to the IRS.”

Keep good records to avoid issues at tax time

So, how will users who receive a 1099-K prove that certain transactions are not deductible or reportable

Good record keeping seems to be the answer.

“While you would not need to report these types of transactions on your tax return, if you received a Form 1099-K for the year, keep a record in your tax files or discuss it with your tax advisor as to why the amount on the Form 1099-K did not need to be reported on your tax return ... in case you are asked about this,” Brandenburg said in an email.

PayPal and Venmo have a toggle that allows its users to identify which transactions are for goods and services, but that is not the case for all other similar applications.

What happens to users of TPSOs that do not give them the ability to identify transactions as a good or service?

Again, record keeping remains king.

“The IRS will not likely not know if (a transaction) is a reimbursement, gift or donation,” said Brandenburg. “The recipient should know this and can report any required items on their tax returns but should keep track of any items that do not need to be reported on their return in case they are ever asked about this.”

To ensure the 2023 tax season is smooth sailing, users who know that they will surpass the $600 threshold should keep tabs on their goods and services transactions within third-party settlement organization apps.

“[Those users] should be tracking their receipts and use the receipts to reconcile their own records with what is included on their Form 1099-K,” said Brandenburg. “Individuals who surpass the $600 threshold will need to report their actual receipts for the year on their tax return, and this could potentially differ from what is shown on the Form 1099-K.”

If you are still concerned about the new reporting requirement and how it may affect filing your taxes in 2023, Brandenburg and TPSO representatives suggest consulting with a tax professional.

Contact Beacon Journal reporter Tawney Beans at tbeans@gannett.com and on Twitter @TawneyBeans.

This article originally appeared on Akron Beacon Journal: Will users pay taxes on Venmo, Cash App transactions? It depends