New IRS rules require reporting income for some transactions of just $600 or more, down from a much higher previous threshold. Wealthy clients who routinely pay domestic help and other workers could get tripped up in tax reporting.
While it seems innocuous to conveniently pay a nanny or housekeeper with Venmo, the American Rescue Plan Act of 2021 modified 1099-K reporting requirements for third-party payment networks such as Venmo, PayPal and Zelle. People who perform services as independent contractors and get paid via payment apps will also now receive 1099-Ks if the total exceeds $600 with no transaction minimum.
Ken Eyler, CEO of Aquilance, said that the change took effect in January for all transactions, “meaning most people will start receiving 1099-Ks in January 2023,” he said. “There are, however, 10 states that decided to implement a year early with the same rules.”
Wealthy individuals may also be targeted due to a knock-on effect, Eyler said, when recipients are deemed to be employees and the IRS or SSA starts looking at their income and where it came from. “Anyone misclassifying domestic employees and paying through Zelle, Venmo or Paypal may then become the next level up to look at,” Eyler said.
The former threshold was $20,000 and 200 transactions.
“People who were not reporting due to the high threshold may now have to report, and the recipient may be issued a 1099-K,” said Varun Vig, director in the Personal Wealth Advisors Group and a member of the Financial Services Group at EisnerAmper in New York.
“The large difference between the old and new rules is what caught most people’s attention,” said Casey Pisano of Biondo Investment Advisors in Milford, Pa. “The takeaway here highlights age-old advice since the original draft of the tax law: Recordkeeping really runs the day. If your transactions are commercial in nature and exceed the new limit, then you should have adequate records for those transactions in addition to filing the required reporting forms with the IRS."
“Several examples often affect wealthy families,” said Mallon FitzPatrick, managing director at Robertson Stephens Wealth Management in New York. “Household staff, whether babysitters, nursing aides, gardeners, or housekeepers, are often paid in cash and employees are expected to self-report their income."
“Our clients with household employees, such as full-time nannies or elder care providers, utilize a payroll service provider to assist with the payment of wages through direct deposit or paper check,” Michael R. Pace, a CPA and partner in Friedman LLP’s Private Client Services practice in East Hanover, N.J. “Comingling payments by way of cash and electronic transfers through a third-party network could cause a headache for both the client/employer and their employee.”
Vig said this doesn't all impact traditional payments.