Flint, MI—As of Jan. 1, 2022, payment apps like Cash App, Venmo, and Paypal are required to report business transactions totaling $600 or more to the IRS, which could mean changes for Flint’s small business owners and gig workers as well.
“A lot of cash-based businesses—so barbershops, hair stylists, and just smaller businesses who don’t have a business bank account—will be the main people who are impacted,” said Pam Bell, Flint native and owner of Viking CPA Group.
Bell said that, technically, small businesses and contractors that use payment apps for their business should have already been reporting that income. However, that might not have been the case since apps themselves were not required to report businesses’ transactions to the IRS unless they totaled $20,000 or more for the year.
“Historically they wouldn’t get anything reported to the IRS if it was less than $20,000 or 200 transactions,” said Bell.
The IRS adjusted third-party payment app reporting requirements from $20,000 down to $600 as part of the American Rescue Plan Act of 2021, meaning the first reporting cycle for the apps and businesses that use them will be on 2022/2023 tax returns.
What business owners (and non-business owners) should expect
Starting Jan. 1, 2022, payment app users will receive 1099-K forms from their app of choice—whether that is Venmo, Paypal, etc.—for payments received through Jan. 31 of 2023.
It will be up to the business owners to keep proper records in case of discrepancies or misunderstandings as the change in reporting takes effect, since the 1099-K may include both taxable and nontaxable transactions.
“I personally, am not a fan of Cash App and Venmo for business, just because you know, you can’t get someone on the phone if you have any issues,” Bell said, adding that she suggested that business owners who do use these platforms consider getting a business bank account and accounting software instead.
“At least go into it now as a mindset like, ‘Okay, the IRS now sees me as a full, legitimate business, and I should act accordingly,’” Bell said.
While the reporting change is meant for business transactions only, it may be a bit messy for both businesses and individual users in this first reporting year.
“Be prepared for the IRS to come back and say, ‘Oh, we’ve got this 1099-K from Cash App that you have this taxable income,’” Bell said, at which point a business may need to show the IRS that a particular transaction was not for a good or service they provide.
Or, in the case of individual users, they may need to explain that they are not actually a business at all.
“I do foresee a lot of that happening when this law comes into play,” Bell said.
A move toward greater financial literacy
Ebonie Gipson supports Flint’s small business owners through her consulting firm, I’m Building Something Consulting.
Gipson said she hopes the tax reporting change for payment apps will translate to the city’s small business owners working to formalize their financial processes.
“For small businesses, operations and accounting are two of the biggest challenges in running or managing your business,” Gipson said. “What I’ve seen in helping so many businesses, most people are starting a business out of a hobby or a need, not necessarily out of having experience in running a small business or business management.”
Gipson said this “side hustle” aspect of Flint businesses means many local entrepreneurs haven’t set up a business account or accounting software like Balentine suggests, and many might not know how to without support.
“I’m hoping that even some of the entities that are helping entrepreneurs, especially in the city of Flint, I hope that there is a viable plan to help prepare them,” Gipson said. “I’m hoping that even knowing this information brings a spotlight to the importance of making sure that we are even more intentional about helping small businesses with their financial health.”
Gipson said that financial illiteracy, both in everyday life as well as for businesses, is especially prevalent in already financially disenfranchised communities like Flint.
“I think sometimes it’s so easy to forget how people started their businesses … especially in (Flint), a lot of times we’re going back and course correcting, because they didn’t start with—we didn’t start with—all resources on deck,” Gipson said.
“So I think just in knowing that, I just really hope that there is a push (toward financial literacy). Because if we’re not careful, a lot of small businesses will run into trouble if they are not aware of this and not preparing for it.”
Great article! I agree with a push for financial literacy, so that side hustle level business can grow into strong vibrant businesses, without having to worry if someone will be coming after them for accounting or un-intentional fraud issues. Get your financial house in order then strive for greater business success.
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