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The $600 Rule In Online Payments

Do you receive or send $600 or more in online payments? Get ready for some extra bookkeeping!

A new law requires that e-commerce and digital payment platforms that transfer money from a buyer to a seller must now issue the recipient a Form 1099-K if they receive $600 or more in a calendar year. As you would expect, the IRS will also get a copy of the form. Sadly, the prior allowable threshold–$20,000 earned through at least 200 transactions is no more.

New technologies are making money more digitized and harder to track for the IRS. Thus, it is now concerned about income going unreported by cash-intensive businesses and businesses that receive electronic payments.

The law is widely seen as having the most significant impact on businesses that use platforms like Etsy and Airbnb and people who get paid with mobile payment apps like Venmo or PayPal. These apps ask senders whether they’re sending money for “goods and services” or to “friends and family.” Both apps say the tax forms go out only for payments received through goods and services transactions, not for paying friends back for things like a shared vacation.

This $600 Rule will put more affluent people “on the radar” as they pay household help, nannies, cooks, landscapers, and personal assistants through payment apps.

The new law also requires taxpayers to distinguish between taxable and non-taxable transfers of money. For example, paying for a service like a haircut would be treated differently than reimbursing a friend for your share of a dinner date.

“The law is clear that money received as a gift or reimbursement of a share of a meal should not be reported on a 1099-K,” said the Taxpayer Advocate Service. “But mistakes may happen.”

The rule also complicates the math a taxpayer may have to do when reselling an item. You can’t claim a deduction for selling personal property at a loss. But if your eBay sales are considered a business, you may be able to use its losses to offset or reduce other business income. However, if your business purchased a vintage brass table in 1985 for $50 and sold it this year on eBay for $1,200, you must report the $1,150 profit on your federal return as an investment sale.

The takeaway is that the government only sees the movement of money and cannot necessarily judge whether a money transfer is a taxable or non-taxable event. The onus is on the taxpayer to keep records and receipts. If you cannot prove the payment was non-taxable, it will be attributed as income.

Need help figuring out whether to pay digitally or not? Call C&B for advice at 201.787.6542.

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