(WFSB) – New changes in the New Year could have a huge impact on people who transfer money to their phones.
For example, those who use apps like Venmo, PayPal, and Cash App.
“I use Venmo and Cash App,” Luke Bowerman said.
Like millions of Americans young and old, Bowerman transfers money to his phone.
“I would say between in and out, about $ 100 per month,” he said. “The main thing I use it for is if I go out to a restaurant to split the bill. “
Under the American Rescue Plan Act, next year transactions totaling $ 600 or more could earn someone like Bowerman a Form 1099-K.
This is a radical change from the requirements of years past where anyone making 20,000 or 200 transactions per year would have to report it.
“I feel like $ 600 is a very consuming amount,” Bowerman said.
Why is this happening? Tax Clinic Director Sara Spodick of Quinnipiac Law School explains.
“There is really a huge drive to close the tax gap, and this is seen as transactions that occur between individuals and also in the odd-job economy,” Spodick said.
She added that the intention was to target those with secondary issues.
“These people are mostly cash or receive payments on these peer-to-peer transactions, and they weren’t including it in their gross income,” Spodick said.
Remember last year when government payments poured into bank accounts. Many times qualifying was based on what you won.
“I think the thought was’ look, if we’re going to distribute these perks, we really should have a better way to capture some of these side gigs that are happening,” “Spodick said.
So, enter this new reporting rule.
While it’s supposed to target businesses, when the threshold is set at $ 600 per year, it can easily affect the average person, like Bowerman.
” I do not like it. It will definitely be something I will consider when I go out to a restaurant, ”he said.
The big question is whether people like Bowerman, who don’t have a gig next door and just use these apps for their convenience, will be subject to the tax.
“There’s this kind of misconception that individuals will now have to be taxed on anything that goes through these apps that costs over $ 600. This is not what is happening, ”Spodick said.
So the tax will only apply to those who sell goods or services, not personal payments, but Spodick said we may be audited.
This is because there are questions as to whether these apps will blindly issue 1,099,000 forms to anyone with transactions over $ 600.
“We should expect a higher audit rate from these people, we don’t know how the IRS is going to program its computer systems to detect them as what their thresholds are,” Spodick explained.
Applications try to make it easier for users. There are now clear notes on the types of transactions.
Here is “a payment between friends” and here is one for “a good or a service”. It will help us if we are audited, but again we are still not sure if these distinctions will help the average user not to get a tax form.
This is forcing businesses and regular users to rethink how much they will depend on these apps in 2022.
“I think it will make people take a more serious look at their side,” Spodick said.
So here’s the biggest takeaway for the New Year – it doesn’t matter if you’re a business or not, keep accurate records of your transactions in case you get audited. If you are a business, now is the time to create a separate business account on these apps.
Also, when using the apps it is essential to get perfect usernames. This is because once the money is sent, there is really no way to get it back.
Think of these apps as highways. Highways that move your money from bank to bank and as NerdWallet’s Chanelle Bessette explains, once you hit send there’s no U-turn.
“Unfortunately, if you’ve sent money to the wrong person, it’s more of a user error and they can’t always give you a refund,” Bessette explained.
Often times, those who made a mistake will have to rely on the recipient to be honest.
According to Motley Fool, 75 million people are active per month on Venmo and 40 million on Cash App. As apps gain in popularity, getting the right usernames is important in order to protect your money.
Also connect with your contacts on the app.
“Search for your friend through the app and make sure you are a friend who asks whoever you want to send money to,” Bessette said.
In addition, send a small amount first before sending the full payment.
“It’s a really good idea to send a test payment, maybe a dollar or two, and make sure they get the money. If they did, that means you’ve got the right fit, ”Bessette said.
Here is another tip to secure your payments … The applications have other integrated tools to ensure the security of your payments. You have friend requests, but confirmation can also come from the last four digits of your phone number.