IRS 600 Dollar Rule: How It Affects You

There’s no doubt that ways to earn income online are growing, and companies like PayPal and Venmo are legally bound to report these payments. But, if you’re confused if paying taxes on third-party payment apps applies to you, along with what the IRS 600-dollar rule is, then keep on reading.

In this article, we’ll cover:

  • The IRS $600 rule and why it was implemented
  • When this new rule applies to you
  • What is the 1099-K form
  • What happens if you don’t report this income to the IRS

This IRS rule recently changed, so it’s vital to keep updated on this tax return change. If you misfile, you’ll be liable for the tax debt. Remember that unpaid taxes will incur penalties and interest, which increase the balance due rapidly. Understand more about tax penalties.

What Is The 600-Dollar Rule? Why Did The IRS Implement This Rule?

The IRS 600 dollar rule comes from the American Rescue Plan Act of 2021 and is targeted toward business owners or those with a side hustle. The previous limit used to be $20,000 and 200 transactions. This rule has changed to $600 and unlimited transactions.

In other words, if you use payment transactions to earn any type of income you’re required to report it to the IRS once you earn over $600 (Six Hundred Dollars) on the app. You’ll be issued a 1099-K form. Learn about different taxable incomes.

If you’re not a business owner and just use third-party payment apps to send money to friends and family, then this rule doesn’t apply to you. Discover more about personal tax situations.

Common 600-Dollar Rule Exceptions

There are 2 common exceptions to the IRS rule. Let’s go through them below:

  1. You’re not making an income: As we mentioned above, if you don’t use third-party apps to collect payments from clients or customers, then this rule is completely irrelevant to you. Make sure you check the “Friends and Family” option (or similar) when sending money to minimize the chance of confusion. More on personal transactions.
  2. You didn’t make a profit: Even if you’re a business owner, you won’t be able to be taxed on losses. For instance, if you bought a couch for $1,000 but only resold it for $800, you didn’t technically make any income and therefore don’t need to report it. Find out more about reporting losses.

$600 Tax Rule for Individuals

This specific rule adjustment by the IRS has implications for individuals who might not necessarily consider themselves business owners but engage in transactions that qualify as income. Here’s what individuals need to know:

  • Occasional Sales: If you occasionally sell items online, the IRS is not necessarily considering these as taxable events unless they meet certain criteria for business activity.
  • Hobby Income: Money earned from hobbies that exceed $600 should be reported, but the rules around such income can be complex. It’s important to distinguish between hobby income and business income.

What Does The 1099-K Form Include? Why Am I Receiving This Form?

If you earn over $600 (Six Hundred Dollars) from any platform (even if not issued a form by the platform), you must submit the 1099-K form with your tax return. Learn about 1099-K form requirements.

Though this rule applies to any earned income over $600 (Six Hundred Dollars), we’re focusing on third-party payment transactions in this article. For more details, see Understanding IRS Notices and Letters.

The 1099-K form includes your gross income earned and the number of transactions per payment entity you qualified for. These third-party payment transaction companies are required by law to issue you a 1099-K form if you made over $600 (Six Hundred Dollars). More on payment transaction reporting.

Do You Have To Pay Taxes On The 1099-K Form? What Happens If I Don’t Report To The IRS?

Though all companies will issue you a 1099-K form once you earn or receive $600, you only have to pay tax if it’s income from customers or clients. If it’s a payment from a friend, family member, or acquaintance you’ll still receive the 1099-K but will not have to pay taxes since it’s not declared as income. Further information on tax obligations.

If you don’t file a 1099-K when you should have, penalties and interest will start accruing on the balance. Additionally, the IRS will start its collections process to force you to pay your back taxes in full. See more about IRS collections.

Yes, you will most likely have to pay income on this form, since you’re considered self-employed, there are many deductible expenses you could claim that would lower your tax burden. Explore self-employed deductions.

Also, be sure to keep a close eye on where you receive your income. You don’t want to document receiving a payment twice, when in reality, it was one payment. Tips on tracking income.

For instance, if a client paid you $100 (One Hundred Dollars) over PayPal, be sure to document that in your accounting book. This same amount will also pop up in your bank statement once you cash it out from PayPal, and you don’t want to report this income twice. Guidance on documenting income.

The Takeaway

Taxes are infamously complicated — but they don’t have to be. If you’re tired of being stuck in tax debt, sign up for your free tax consultation. From this call, you’ll be able to determine if you qualify for our services and which tax relief program will work best for your unique situation.

TaxRise has helped thousands of taxpayers just like you resolve their tax issues and erase their tax liability. Book your call and get started today!

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