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What Freelancers Should Know About the IRS & Venmo

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Candace Dixon

Nov 30th 2021

The American Rescue Plan Act (ARPA) of 2021 has a provision for businesses that you may not be aware of, and it certainly seems to be making waves across the internet lately. In fact, the Internet Association even wrote a letter to Congress protesting it.

Section 9674 of ARPA amended certain sections of the Internal Revenue Code, including tightening the de minimis exception, lowering the threshold for reporting third-party settlement network payments on Form 1099-K to $600 starting in January 2022. Currently, 1099-K's are only required when users of cash apps such as Venmo receives over $20,000 in goods and services transactions and has more than 200 transactions for goods and services transactions in a calendar year.

Venmo is a cash app, or digital wallet, owned by PayPal used to send and receive money.

While the tax reporting by Third Party Settlement Organizations (TPSOs) is changing, requiring them to report transactions made for goods and services made by customers with $600 or more in annual gross sales on 1099-K forms, these changes in 1099-K reporting didn’t change tax obligations.

Form 1099-K, Payment Card and Third-Party Network Transactions, is simply an IRS information return used to report payment transactions to improve voluntary tax compliance. If you're using Venmo, or other cash apps to receive business income, you should have been reporting that income all along, and so you have nothing to worry about. The ARPA measure only applies to transactions for commercial sales of goods and services, which are already considered taxable income.

ARPA clarified that TPSO reporting obligations do not apply to personal payments. Venmo transactions between friends for splitting the tab for a ride or dinner or reimbursing friends and family for expenses aren't affected. If you've been keeping your business and personal income separate like you should, you won't have a problem.

ARPA also clarified that this new rule doesn't apply to commercial transactions that may not be considered taxable after expenses are deducted. It doesn't apply to people who use Venmo to make charitable contributions or for payments of royalties or rents.

Why such a dramatic change to the commercial users though? The pandemic caused an entire new workforce dynamic, on filled with gig economy and self-employed workers. This burgeoning new workforce joined others before them who already may have been misreporting or underreporting their income from cash app payments since they didn’t receive a 1099-K form from the company. According to IRS Tax Gap studies, it's estimated that 63 percent of income is misreported when third parties do not provide information to the IRS, such as with a 1099-K, according to a 2019 report on the gig economy by the Treasury Inspector General for Tax Administration.

Digital work platforms allow users to earn money from their labor while other platforms allow them to earn money from their capital (in other words, things that they own or possess). A Pew Research survey looked at two types of capital platforms: home-sharing sites, where people can rent out all or part of their homes for a brief period of time (less than 1 percent of people used home sharing sites to supplement their income), and online selling platforms, where users can sell items ranging from used goods to crafts they make - 18 percent of Americans have earned money in the last year from selling something online.

The Internet Association's letter to Congress claimed that these new tax reporting requirements would discourage small sellers, holding back the online economy. The scathing letter cited potential issues including "burdensome paperwork," possible overpayments, and privacy concerns, and asked the question, "Do we really want to mandate additional headaches and risk noncompliance when filing taxes for folks just trying to clear out clothes from their closet?" This is quite a interesting statement, being that you don't have to be pay taxes at all on income you make from selling your own items as long as you sell them for less than they cost you. According to Pew, 74 percent of online sellers have earned money in the last year by selling their own used or second-hand goods, while just 2 percent earned money by selling handmade items online and 2 percent by selling a line or brand of consumer goods.

The lack of some sort of "national campaign to educate gig economy workers on paying taxes" is another huge trigger for people - but if you're a freelancer, you should have already been receiving form 1099-MISC or 1099-NEC if you earned $600 or more, and you have to pay taxes on the income whether or not you receive the form. That's what separates work from a hobby. It shouldn't be a shock that you have to pay taxes on the work you do. This isn't even the first attempt to raise the threshold - H.R. 1625, S. 700 introduced in 2019 sought to bring the thresholds for both forms to $1,000.

The IRS clearly states that you must file a tax return if you have net earnings from self-employment of $400 or more from gig work, even if it's a side job, part-time or temporary, and you must pay tax on income you earn from gig work. Also, the gig economy has been covered quite a bit during the pandemic in order to educate people. Technology expert Shankar Maruwada said that "policymakers also need to make sure they are well equipped to manage the technology and are able to regulate and moderate this trend" back in 2018, when there were already 57 million gig workers in the United States. The average gig worker income was $17,445 in 2020 according to a survey by daVinci Payments- so no matter whether a 1099-K is sent on $600 or $20,000, those workers were responsible for paying taxes on that income.

Why weren't gig workers and freelancers already prepared to pay their taxes? The 1099-K is a listing of transactions, not a magical piece of paper that mandates taxes. Tax existed on the work regardless of if there is a 1099-K or not.

Venmo in particular was only supposed to be used for personal reasons before 2021 – it explicitly stated on its site that you should not use it for business payments. In 2021, the company launched a feature called “Business Profiles,” which allows users to send and receive business payments, but the business accounts must apply and be explicitly authorized to accept Venmo for purchases of goods and services.

Will the new legislation stick? We'll find out. H.R.3425, the Saving Gig Economy Taxpayers Act, was introduced to reinstate the exception for de minimus payments by third party settlement organizations for payments made in settlement of payment card and third-party network transactions, as in effect prior to the enactment of the American Rescue Plan Act.

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