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5 Things to Know about the IRS $600 Income Rule You've Been Hearing About

Summary: Overall the law hasn't changed. Regardless of how income is received, you are required to tell the IRS about all the money you earned (and entitled to claim appropriate expenses to reduce your tax burden). Now they're thinking about making it easier to receive information about undisclosed income that might have previously gone unreported.

A lot of noise has been made recently about the government's plan to monitor and tax all payments that come through apps like CashApp and Venmo. I generally recommend that entrepreneurs avoid these platforms for receiving revenue, but many continue to use the service, sometimes as a way to avoid the reporting of income that comes with other payment processors. That may be about to change.

The latest news is that IRS will requre that users receive a 1099-K docs sent from places like Venmo and CashApp if you make more than $600 in commercial transactions. A couple of things to know in case you've seen this floating on your timeline:

1. The rule would only apply to business transactions, so receiving money for rent or food or ridesharing from your friends wouldn't count as income.

2. Many payment processors were already doing this but at a much higher threshold. For example, PayPal and Stripe send a 1099-K form to business owners who processed more than $20k in revenue and 200 payments in the same year. This change would allow the IRS to tax those businesses who were avoiding reporting ALL of their income from third party processors as required.

3. The IRS will not be monitoring individual transactions from your bank account to "catch you" from reporting all of your income.

4. The 1099-K form itself does not automatically create a tax liability and is simply information reporting of income for tax purposes.

The rule isn't in place yet; if and when it is passed, it would likely begin in 2022. But for now, you can avoid unnecessary fears by engaging a tax professional to help you ensure that you are reporting all of your income and expenses properly to stay on the right side of the IRS. Not doing so could result in potential audits, reviews, or penalties.

P.S. If you are/were using cash apps to receive income and avoid fees, a better practice would be to raise your prices to appropriately account for this cost of doing business.

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