CashApp, Venmo, Booksy...
- Davian Rhodes, CPA
- Aug 27, 2024
- 4 min read
Updated: Feb 26
D. Rhodes, CPA, Writer and Editor
In the world of business, cash has long been king. But as the industry spirals deeper into the digital age, third-party payment processors like CashApp, Venmo, Zelle, and PayPal have become the new royalty. However, this convenient tool comes with a catch – one that's making financial management and tax filings a lot trickier.
Remember when you could just slap a "Cash Only" sign on your door and call it a day? Those times are fading. Third-party payment processors are becoming more and more strict on requiring users to provide either an Employer Identification Number (EIN) or Social Security Number (SSN) to create or maintain an account. This isn't just a formality – it's the IRS tightening its grip on the digital economy.
These payment processors are required by law to report your earnings to the IRS via Form 1099-K. This form is like a tattoo on your financial arm – permanent and very visible to the taxman.
How does it work? Let's break it down:
You accept payments through a digital platform.
The platform keeps track of your transactions.
If you meet certain thresholds (more on that later), the platform sends a 1099-K to both you and the IRS.
The IRS now has a record of your income, whether you report it or not.
It's like having a reality tv show of your finances and the IRS tunes in every night at 8:00pm.
Who Cares...Right?
Now, you might be thinking, "So what if they know? I'll just... not file taxes." Hold that thought.
When your SSN or EIN is linked to an account, it's like leaving a trail of hair clippings right to your door. The IRS's algorithms are getting smarter by the day, and they're excellent at connecting dots.
*If You Don't Know Now You Know: The IRS generally has three years from the date you file your return to audit you. But don't get too comfortable – this period can be extended to six years in certain cases. For instance, if you underreport your income by more than 25% of the gross income shown on your return, the IRS gets an extra three years to take a closer look at your finances.
And if you think you can outsmart the system by not filing at all? Think again. For non-filers, there's no time limit. The IRS can come knocking at any time, and trust us, they're patient - allowing interest and penalties to pile up, so by the time they come knocking, that unpaid tax bill could look more like a small mortgage.
The point is this: While you might not see immediate consequences, remember that the IRS plays the long game. Those unpaid taxes could be silently accruing interest and penalties, turning a manageable sum into a financial nightmare down the road.
It's like letting a bad haircut grow out – it only gets worse with time.
For those who use booking platforms, it's even easier for the IRS to track your income. Most booking platforms are built on third-party payment processors (most commonly Stripe). So if you're using these to book clients and accept payments, you're already in the system. The IRS doesn't need to be Sherlock Holmes to figure out your income – it's all there in black and white.
Lastly, as if federal reporting wasn't enough, states are getting in on the action too. The thresholds are constantly changing per state and is usually lower than the federal threshold which is $5,000. This means if you make more than $5,000 per year using these third-party payment processors – you're either in the system or will be soon enough.
Let's take a look at some state examples:
North Carolina: $600 threshold and same filing date as IRS
South Carolina: If state withholding is required, follow the IRS threshold and same filing date as IRS
Virginia: $600 threshold, due by April 30th
Georgia: Follows the IRS threshold and filing date
Louisiana: If state withholding is required, follow the IRS threshold and same filing date as IRS
The days of flying under the radar are coming to an end. Third-party payment processors are becoming the IRS's eyes and ears in the digital economy. If you've been playing fast and loose with your financial management and taxes, it's time to clean up your act.
Here's what you need to do:
Get your EIN if you don't already have one, so you're not directly using your SSN.
Keep meticulous records of all your income, digital or otherwise.
Consider working with a professional.
Remember, it's not just about avoiding trouble with the IRS. Proper financial management and tax compliance can open doors to free money like business grants, business loans, home mortgages, commercial lending and other opportunities that require proof of income.
Remember: Our ultimate goal is to help you save time and money, while building wealth and legacy.
The choice is yours, but the clock is ticking. Reach out today so we can help get you from where you're at, to where you want to be. Your move boss.
*This article provides general information, not individual tax advice. Tax situations vary; consult with a qualified tax professional, like myself, for advice specific to your circumstances.