(WFSB) -- New changes in the new year could have a huge impact for people who transfer money on their phones.
For example, those who use apps like Venmo, PayPal and Cash App.
“I use Venmo and Cash App,” said Luke Bowerman.
Like millions of Americans, young and old, Bowerman transfers money on his phone.
“I would say between going in and out, about $100 a month,” he said. “The main thing I use it for is if I go out to a restaurant for splitting the bill.”
Under the American Rescue Plan Act, next year, transactions totaling $600 or more could have someone like Bowerman getting a 1099-K form.
It’s a drastic shift from requirements in years past where anyone cycling $20,000 or 200 transactions annually would need to report it.
“I feel like $600 is a very consumer amount,” Bowerman said.
So, why is this happening? Tax Clinic Director Sara Spodick, from Quinnipiac’s School of Law, explains.
“There’s really a huge drive to close the tax gap, and that is considered to be transactions that happen between individuals and also in the gig economy,” Spodick said.
She added that the intention was to target those with side hustles.
“These individuals are mostly cash or receiving payments on these peer-to-peer transactions, and they weren’t including it in their gross income,” Spodick said.
Think back to last year when government payments were flying into bank accounts. Many times, the qualifications were based on how much you earned.
“I think the thought has been, ‘look, if we’re going to be handing out these benefits, we really should have a better way to capture some of these side gigs that are happening’,” Spodick said.
So, enter this new reporting rule.
While it’s supposed to target those with businesses, when the threshold is set at $600 annually, it can easily affect the average person, like Bowerman.
“I don’t love that. It’s definitely going to be something I consider when I go out to restaurants,” he said.
The big question is will people like Bowerman, who don’t have a side gig and who simply use these apps for its convenience, be subject to tax.
“There’s this sort of misconception that now individuals are going to be required to be taxed on anything that runs through these apps that’s more than $600. That’s not what is happening,” Spodick said.
So, the tax will apply only to those selling good or services, not personal payments, but Spodick said we could get audited.
That’s because there’s some questions as to whether or not these apps will blindly issue 1099k forms to anyone who has transactions over $600.
“We should expect a larger audit rate of these individuals, we don’t know how the IRS is going to program its computer systems to pick these up like what their thresholds are,” Spodick explained.
The apps are trying to make it easier for users. There are now clear notes on the types of transactions.
Here’s “a payment between friends” and here’s one for “a good or service.” This will help us if we get audited, but again, we still don’t know if these distinctions will help the average user not get a tax form.
That’s having businesses and regular users rethinking how much they’ll rely on these apps in 2022.
“I think this will force people to look at their side hustles a little more seriously,” Spodick said.
So here’s the biggest takeaway going into the new year -- it doesn’t matter if you’re a business or not, keep precise records of your transactions just in case you’re audited. If you are a business, now is the time to create a separate business account on these apps.
Also, while using the apps, it’s critical to get usernames perfect. That’s because once the money is sent, there’s really no way of getting it back.
Think of these apps like highways. Highways that move your cash from one bank to the next and as Chanelle Bessette from NerdWallet explains, once you hit send, there are no U-turns.
“Unfortunately, if you’ve sent money to the wrong person, that’s more of a user error and they can’t always return the money back to you,” Bessette explained.
A lot of times, those who made a mistake will need to count on the recipient to be honest.
According to Motley Fool, 75 million people are actively month on Venmo and 40 million are on Cash App. As the apps grow in popularity, it’s important to get the usernames right in an effort to keep your money safe.
Also, connect with your contacts on the app.
“Search out your friend through the app and make sure you’re actually friend requesting the person you want to send money to,” Bessette said.
Also, send a small amount first before sending the full payment.
“It’s a really good idea to send a test payment, maybe a dollar or two and make sure they receive the money. If they have, that means you have the right person,” Bessette said.
Here’s another tip to make your payments more secure... The apps have other built-in tools to ensure your payments are secure. You have the friend requests, but also confirmation can come through the last four digits of your phone number.