Most probably, you got funds from loved ones or clients using a payment application like PayPal, Google Pay, Cash App, or Venmo. While some of it may be used for reimbursements, some of it could be used for fee payments. A few people kept their business and personal transactions separate, but most likely didn’t and mixed their money.
The American Rescue Plan of 2021, a federal tax code amendment passed earlier this year, requires that payment app producers issue Form 1099s if the entire amount paid to an individual from the app in a calendar year exceeds $600. These apps used to only issue 1099s to users who conducted over 200 transactions totaling at least $20,000.
The issue is that in today’s world, $600 is not a lot of money. Casual payments would typically exceed $50 each month. There would be so many people who would have to report. Additionally, there was no IRS advice on how to report the revenue and how to deduct nontaxable expenses. Without support, the majority of taxpayers would have to file tax returns with a Schedule C, which would be used to declare income and list deductions that would reduce it. Also, they have to buy the most expensive tax preparation software.
Another issue is that to comply with the legislation, payment apps may ask users to verify their identity before allowing them to continue using the application. Due to this, fewer users may opt to utilize cryptocurrency or cash.
Thankfully, the IRS just indicated that they would postpone the need for all transactions to be reported in 2021. In it, the IRS Acting Commissioner claimed that the extra time would provide taxpayers more time to prep for and know the new reporting commitments, as well as lessen confusion during the coming 2023 tax filing season.
Additionally, it was clarified that the rule is not meant to keep track of private transactions like splitting the cost of a meal or a vehicle ride, giving gifts for birthdays or holidays, or paying a relative or friend to pay a household bill.