If you use Paypal, Zelle, Cash App or Venmo to collect rent, new rules mean that you could owe taxes on digital transactions. Starting in 2022, the Internal Revenue Service (IRS) will begin checking digital wallet business transactions over $600.
The new rule under the American Rescue Plan Act focuses on small businesses, self-employed people, and people who have side hustles.
Commercial transactions on cash apps will notify the IRS, and business owners can expect to receive a 1099-K form.
The new rule is only for businesses, not personal transactions.
What Does This Mean?
Until recently, apps like Venmo, Zelle, and PayPal only had to report on over $20,000 in aggregate payments. Some landlords and other small businesses capitalized on this and started using cash apps to collect rent. The money never went to a bank account, so it wasn’t on the IRS’s radar.
However, as of January 2022, all of that will change. If you receive over $600 in yearly income on Venmo, Cash App, Zelle, or PayPal, you will receive a Form 1099-K.
Of course, having to pay taxes on income through cash apps is normal. So, if you are already reporting all of your rental income—whether it’s by paper check, bank transfer, or cash app—the new rule won’t affect you. But if you’ve been haven’t been reporting income received through a digital wallet, you will be paying more to the IRS.
It’s important to note that this rule doesn’t extend to personal transactions. The taxes don’t apply to receiving money from family and friends as reimbursements or gifts.
If you receive over $600 in a calendar year, you will still automatically receive a 1099-K form. However, if the money received was only for personal transactions and not business transactions, you won’t have to pay taxes on it.
Tax Rule Changes
The new changes in how cash app business transactions are reported are spelled out in the American Rescue Plan Act of 2021. The reporting threshold for “third party settlement organization” was reduced from $20,000 to just $600 in total payments. The most significant impact of this new rule is on self-employed workers, gig workers, and many people with side hustles. It is estimated that the changes will raise over $8.4 billion throughout the next 10 years.
So how could this new rule affect your small rental business? Let’s say you own one or two rental properties to earn some money on the side, and you use Venmo to collect rent. Starting in January 2022, Venmo will notify the IRS about the rental money you receive. Then you will get a Form 1099-K from the IRS with all your reportable payment transactions over $600 in a calendar year.
What Should You Do?
Most financial experts advise those who run a business and use cash apps to keep a good record of all taxable transactions and those that are not. Making a separate account for business transactions is recommended. This will help you stay organized and easily identify taxable income.
The most important thing you can do moving forward is to find a reliable way to collect rent and deal with financial transactions related to your rental business. Check out this insightful article to learn more about better options than cash apps.
Property management software is an ideal option because it will help you with bookkeeping and collecting rent. You don’t have to worry about fees stemming from cash apps and navigating new tax rules. Instead, you can use software that supports financial transactions and accounting.
Wrapping Up
Although this change may be less than ideal, hopefully, it doesn’t have a significant impact on your business. If it does have a significant impact, it may be time to reconsider how you do business. Property management software could be a great way to streamline your business and avoid some of the complications associated with cash apps. Cash apps aren’t a long-term solution for rent collection in the first place, so now is as good a time as any to look for alternatives.
The new rules are a sign that the IRS may continue to zero in on small businesses and self-employed workers to increase tax revenue. The best defense in this situation is a good offense. Make sure you’re tracking your expenses and start looking for a property management software that meets your needs.
