Cash app taxes could increase ATM usage. Many small businesses, freelancers, and those employed in part-time work who rely on cash apps, or payment applications, might have a new tax form to file next year.
Now, just $600 in online payments will trigger form 1099-K. What does this mean for payment app users? What does this mean for independent ATM deployers (IADs)?
Well, increased tax reporting and scrutiny could push many small businesses and self-employed individuals to encourage or limit themselves to cash transactions. And more cash transactions means more cash withdrawals and more ATM business.
How Popular are Payment Apps?
What are Payment Apps?
Payment apps allow person to person (p2p) transactions. Whether payment is for goods and services or for monetary gifts or reimbursement, payment apps are a quick, convenient, free way to send money to people you know and trust.
Payment apps are popular alternatives to cash because they allow users to pay for goods and services and share money among friends and family without needing to carry a wallet. Payments are now immediate. You don’t have to worry about going to the bank or about someone forgetting to “get you back.”
Payment apps work by linking debit cards, bank accounts, and sometimes credit card information and securely storing it to send and receive money right from your phone. No wallet needs to be present, you aren’t limited to in-person transactions, and in some cases payments can even be made internationally.
The biggest draw is that they are free to use. The only nominal fees are for expedited or extra services.
What are the Most Popular Payment Apps?
The convenience of payment apps has made them quite popular. Some of the most popular payment apps in 2022 are PayPal, Venmo, Cash App, and Zelle. Each of these payment apps has millions of active users all over the world. And many people use more than one depending on their needs.
Each app has its own niche, if you will. PayPal is the oldest payment app. It has earned the public’s trust because of its strong encryption technology used to keep user accounts secure. PayPal is a good option for freelancers and other business purposes because it offers an invoice feature that can be used to specify the nature of purchased goods and services.
Venmo is the most popular payment app for exchanging small amounts of money between friends and relatives. Need to spot a friend $5? Venmo. Need to pay your share of the rent? Venmo. Splitting a dinner bill? Venmo.
Cash App is another hassle-free way to send small amounts of money to contacts. Cash App doesn’t offer the social aspect Venmo does (a feed of who sent money to whom and for what). But it does offer users a digital wallet that enables the buying and selling of bitcoin.
Zelle can be used independently as its own app. Most Zelle account holders, though, use the app through their banking app. Banks like Chase, Bank of America, and Wells Fargo use Zelle to allow their customers to send small amounts of money safely from their bank account.
In order to use one app, both sender and recipient have to have it. So this can cause some people to have active accounts with multiple payment apps at one time.
Do Cash App Taxes Apply to All Transactions?
You might have heard about cash app taxes from unnecessarily worried peers or even seen something in the news. However, very little is actually changing in terms of tax laws.
Monetary gifts and reimbursement are still considered non-taxable income. So only those who receive payment for goods and services through a third-party app should expect to file a 1099-K form with their 2022 taxes next year.
What is a 1099-K Form?
Form 1099-K is a tax reporting form just like many others everyone has filed in their lifetime. It provides the IRS with information about the gross amount of payment transactions a person receives via third-party payment networks (like the ones listed above).
The Good News
You are probably already familiar with this form if your gross payments exceeded $20,000, and you reported earnings if you had more than 200 payment transactions. The difference now is that rather than the $20,000 threshold, it’s $600. And rather than 200 transactions, the minimum is 1.
What this means is that more people will be filing form 1099-K next year than previously. More people receive at least $600 worth of income in a year paid via payment app than those who receive over $20,000.
These payment app companies are required to send a 1099-K to the tax filer as well as to the IRS. This actually simplifies tax filing! Say a freelancer or part-time worker has multiple streams of income paid through three different payment apps. Rather than hunting down and documenting information for each app separately, form 1099-K contains information about the gross amount of payment transactions made on any and all qualifying third-party payment networks.
So, whether individuals receive one $600 payment in exchange for goods or services or they receive thirty $20 payments, they should expect to receive a 1099-K form by January 31, 2023.
The Bad News
The problem is, it is possible for this form to reflect both taxable and nontaxable transactions. To prevent confusion and delayed tax filing, it might be a good idea to separate business and personal accounts. Otherwise, someone might end up paying more taxes than necessary. And to make sure they don’t, they’ll need to look at the information carefully and compare it to their (hopefully) carefully maintained records….
Those who only receive $600 via digital payment apps in a given year might not see the importance of separating this income from personal gifts and reimbursements or of maintaining records of it. Now that more people will have an extra form to file next year, more people might dread the extra time and responsibility of discerning the information.
However, self-employed individuals are and always have been required to report all earnings to the IRS when filing their tax returns. So those who aren’t trying to break the law don’t have anything to worry about!
Unfortunately, there could be a number of people receiving form 1099-K by mistake. Take, for example, the bride who worried that monetary gifts she received to help fund her honeymoon would be reported to the IRS and taxed. If she were to receive a 1099-K form, all she would have to do is prove that the money she received through digital payment apps was gifted and therefore nontaxable income.
Although this burden of proof might not be so easy for some people, it should be relatively easy to rectify. Mistakes should be reported to the third-party digital payment company who issued the payments. They will resolve the issue, not the IRS.
Why Are Cash App Taxes a Thing?
2021 American Rescue Plan Act
This new law concerning payment or cash app taxes is part of Joe Biden’s 2021 American Rescue Plan Act which was passed by the Democrats in March 2021. (You might be familiar with the additional stimulus payments, enhanced unemployment aid, and expanded child tax credit also covered by this bill.)
As a result of the American Rescue Plan Act of 2021, any transactions made after March 11, 2021 that exceed $600 must be reported to the IRS, regardless of the number of those transactions. Prior to this legislation, third-party payment platforms would only report users who had more than 200 commercial transactions and made more than $20,000 in payments over the course of a year.
It’s important to remember that this bill doesn’t change tax laws, it only changes income reporting. Self-employed individuals have always had the responsibility of reporting income from all sources and paying taxes on it. Now, there is just another form in the mail, and it might include nontaxable income if people aren’t careful.
The purpose of this bill is to cut down on tax evasion. It allows the IRS to keep track of transactions made through payment apps that often go unreported. This digital trail keeps freelancers and other self-employed or part-time workers from not reporting or underreporting their earnings.
Tips for Taxpayers
In order to accurately report income, these apps will need additional information. They will need either an Employer Identification Number (EIN), Individual Tax Identification Number (ITIN), or Social Security Number (SSN). If this information is not already on file with the digital payment apps people use, they will be reaching out to users to confirm tax information due to this new law.
Remember, too, that only money received in exchange for goods and services should be reported and taxed. Nontaxable income includes monetary gifts (birthday, holiday, wedding), split bill payments, and other reimbursements. Any items sold at a loss are also nontaxable. Examples are items sold at a garage sale or on Facebook Marketplace.
But those who purchase new items and resell them for profit should expect to report that income to the IRS. If they don’t, and they receive payment through a payment app, the IRS will know.
The new law requires that form 1099-K go to both the taxpayer and the IRS. So, there is a good chance that they will notice any discrepancies between federal income tax returns and income reports. Therefore, it’s important for individuals to report their taxable income and keep good records.
What Do Cash App Taxes Mean for IADs?
This new legislation affects anyone who receives earnings through digital payment apps instead of direct deposit, paper check, or cash. Those most likely to accept these types of payments are small businesses, freelancers, minors, and other self-employed, part-time workers.
About 1 in 4 Americans makes extra income online. It might be from selling something, renting something out, or providing online services. And global transactions associated with the gig economy are projected to grow to about $455 billion by 2023.
So anyone who doesn’t want their online income reported directly to the IRS will need to conduct more business using cash. Not to mention minors who earn income from mowing lawns, babysitting, caretaking, and other odd jobs.
It seems some kids will be learning about taxes a lot sooner than most. And it could result in their guardians covering these taxes, too. This is just more encouragement for minors and other part-time, odd-job workers to revert to relying on more cash payments. And that’s good news for the ATM industry.
Cash is King
We never believed that digital payment apps would replace cash to the extent that it becomes obsolete. This just confirms what we’ve been saying all along: Cash is king!
It’s safe, it’s private, and it’s universal. Everyone has it, everyone can accept it, everyone can spend it. And as long as cash has a place in society, so will ATM machines and ATM businesses!