The American Rescue Plan Act of 2021 contains a provision that could impact freelance workers and small businesses that use cash apps like Venmo.
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 more than $20,000 in goods and services transactions and has more than 200 transactions for goods and services transactions in a calendar year.
While the tax reporting by Third Party Settlement Organizations 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 an IRS information return used to report payment transactions to improve voluntary tax compliance. If taxpayers are using Venmo, or other cash apps to receive business income, they should have been reporting that income all along, and should 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. Those who have been keeping business and personal income separate 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 are the changes happening now for commercial users? The pandemic caused an entire new workforce dynamic, one filled with gig economy and self-employed workers. This growing new workforce joined others before them who already may have been misreporting or underreporting their income from cash app payments because they didn’t receive a 1099-K form from the company.
The Internet Association sent a letter to Congress claiming the new tax reporting requirements would discourage small sellers and hold back the online economy. The letter cited potential issues including "burdensome paperwork," possible overpayments and privacy concerns.
Venmo in particular was only supposed to be used for personal reasons before 2021 – it explicitly stated on its site that it shouldn’t be used 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.