As of January 2022, all third-party payment processors such as PayPal, Venmo, Cash App, Zelle, etc., must report business transactions if they exceed $600 in a year.
So, what does this mean for you as a consultant?
Well, in this episode, I'm going to identify how this will impact your firm's finances, what you should expect, and the tasks you must complete.
We are at the top of the year, and the tax changes are rolling in already. As a business owner, you must be prepared to handle them effectively.
As of the date of this video, third-party processors have a new tax reporting guideline that can affect your business finances in a significant way.
Before this recent tax law change, third-party processors were required to report to the IRS if a user received payments exceeding $20,000 total or had 200 plus transactions in one calendar year.
With this change, if you received payments for goods and services totaling $600 plus, they are now required to report the amount to the IRS.
What Does This Mean For Entrepreneur Consultants?
- The companies, such as Etsy, Paypal, eBay, Cash App, etc will request tax information from you, such as your social security number or tax ID.
- If you do not provide this information, the third-party company has the right to suspend your account until you do.
- With this information, they will prepare a 1099-K in which they will send a copy to you and the IRS.
- All businesses must have their W2s and 1099s postmarked or e-filed by January 31st.
- This change will take effect now for next year's tax season. (More on that later)
How To Ensure The Amount On Your 1099-K Is Correct?
The only way to ensure that the 1099-K you receive from these companies is 100% correct is to have your bookkeeping in order.
There are several ways this can be completed:
- In most cases, your accounting system should sync with these companies.
- Your bookkeeper should keep track of each payment received and from which company.
- Your bookkeeper should enter this information into your accounting system consistently. At the end of each month, at a minimum (at SYTP, we complete this weekly for our clients),
- Your bookkeeper should complete a Check and Balance Report to ensure that all systems balance with your accounting system.
- You want to make sure that the payments they report actually were deposited into your bank account.
When Does The Change Take Affect?
You will receive the forms at the beginning of next year for this year's transactions. The 1099-K form will be used to fill out your 2022 income taxes that are due in March or April of 2023.
Bookkeeping Best Practices
If the payments are tracked correctly, you will be able to compare what you received on the form against what you have in your accounting system.
If there are errors, you should contact the third-party processor immediately. This is why it's imperative to keep track of the payments received through third-party companies, either monthly or weekly.
If the errors are found on their end, you should have them resubmit the correct amount to the IRS on the 1099-K form.
Keep in mind that whatever they submit to the IRS, you will, in most cases, be taxed on the income received.
The caveat with this tax law change is that it does not apply if a person is using the service to send someone a gift or pay someone back for buying dinner.
Because of this, don't be surprised if some payment processor asks you for more information about specific transactions to see which category the transactions fall into. Also, don't be surprised if you will have to provide the transaction clarity before they send the payment to you.
I highly recommend that your accounting team keep track of these payments monthly or weekly by comparing what your internal accounting system has versus the third-party system.
If you need help with implementing an accurate, reliable, timely accounting system, schedule a complimentary Discovery Session.