Important Tax Change Coming for Users of Payment Apps

There are a great many solopreneurs, sole proprietors, and entrepreneurs who are using payment apps like Square, PayPal, and Venmo to charge or invoice customers or clients. Any one customer or client is required to report what they pay you if it totals $600 or more for the year. Clearly there are many customers/clients who do small bits of business with sole proprietors, and they do not total $600 or get reported. However, when you are using an app like Square, PayPal, or Venmo, the new rule is about to change the game.

Many entrepreneurs and sole proprietors that use these apps for invoicing or charging customers do not think much about how a great many small charges can grow into a considerable sum that the IRS wants to tax. Currently, the bulk of this money is not being reported to the IRS by the apps. These small businesspeople are having their income reported by these apps under the rules as stated on the Square websiteⁱ:

In the US, the state your taxpayer information is associated with will determine your qualification for a Form 1099-K. In most states, accounts meeting both of the following criteria qualify for a Form 1099-K and must be reported to the IRS by Square:

1. More than $20,000 in gross sales from goods or services in the calendar year
2. AND more than 200 transactions in the calendar year

Square may report, solely within its discretion, on amounts below these thresholds to meet state and other reporting requirements.

It is easy see that many transactions may not be reported as they never accumulate for one business to that 200 number AND $20,000+ in gross sales. The new rule is going to change this.

The new IRS rule requires the payment apps to report sales by a business of goods or services that total $600 or more. If you have been letting some transactions drop through the income reporting cracks, you should clean up your recording process to capture them all and report business transactions as income.

The new rule shouldn’t be a huge problem except in one area: double reporting of income. Here is an example of a common situation of small businesses billing clients/customers through a payment app like Square. They have multiple customers/clients that are billed through the app, some totaling more than $600 for the year. If each of those customers report the income to the IRS when over $600 and the app does the same, how does the business owner avoid double taxation or penalties?

There has been no guidance on this double income reporting situation yet. Even if it can be dealt with by the business, there will be considerable extra accounting functions required to keep track. Keep an eye on this new rule to see how the issue can be handled to avoid IRS problems. Consult with tax advisors who stay on the front line of tax changes to keep informed.

i Square Tax Reporting and Form 1099-K Overview – Square.com