IRS delays rule change for people who get paid on Venmo, Etsy, Airbnb and other apps

New York(CNN) Anyone getting paid for their goods and services through apps like Venmo, PayPal or CashApp, or platforms like Etsy and Airbnb, just got a reprieve from the IRS.

Following concerns expressed by the tax community, the electronic transactions industry and some lawmakers, the IRS said Friday it would delay by one year the implementation of a rule change that would have resulted in a virtual paper chase of tax forms going out by January 31, 2023, to anyone using such apps for their business transactions.

The rule change requires third-party payment platforms to issue a 1099-K to the IRS and the app user for business transaction payments if they add up to more than $600 over the course of the year. A business transaction that is taxable is defined as a payment for a good or service, including tips.

It used to be those platforms only had to issue you a 1099-K if you engaged in more than 200 business transactions for which you received total payments of more than $20,000 in a year.

"The IRS and Treasury heard a number of concerns regarding the timeline of implementation of these changes under the American Rescue Plan," said Acting IRS Commissioner Doug O'Donnell. "To help smooth the transition and ensure clarity for taxpayers, tax professionals and industry, the IRS will delay implementation of the 1099-K changes. The additional time will help reduce confusion during the upcoming 2023 tax filing season and provide more time for taxpayers to prepare and understand the new reporting requirements."

Indeed, the increase in 1099-Ks issued early next year for people's 2022 tax returns was expected to be, in a word, "ginormous," according to Wendy Walker, who chairs the information reporting subgroup on the Internal Revenue Service Advisory Council.

Walker works as a solution principal for Sovos, which helps more than 30,000 business clients with tax compliance, including the issuance of all types of 1099s, of which there are at least 16 different varieties.

Some businesses that only had to issue a couple thousand 1099-Ks under the prior rules were looking at a couple hundred thousand, she noted. "Our clients ... have reported enormous increases in their potential filing obligations as result of the threshold change," Walker said.

Meanwhile, those receiving 1099-Ks for the first time will have to figure out what portion of the amount reported on the form is actually taxable versus what portion represents payments that may be deductible business expenses, such as a fee paid to the payment platform or a credit issued to the business, Walker said.

"People are just not going to understand how to take that gross amount and then work off the deductions to get to their taxable amount."

Welcome news to companies having to issue tax forms

The move was welcomed by those representing third-party payment platforms.

"Given the potential confusion the reporting requirement would cause, we applaud the delay, " said Scott Talbott, spokesman for the Electronic Transactions Association. "The $600 reporting requirement is not worth the problems it would cause. ETA will keep working to increase the threshold to a realistic amount."

How does ETA define realistic? A threshold that falls between $10,000 and $20,000, Talbott said. "ETA supports a reporting threshold that ties into regular businesses and not consumers occasionally selling a handbag or a bike online."

What the new rule does and doesn't do

The new rule doesn't impose any additional taxes on anyone. Nor does it change your obligation as a taxpayer to always report to the IRS all of your taxable income from your business activities.

But the 1099-K reporting will make it harder for someone to evade the taxes they owe by underreporting their business income.

The rule also does not apply to personal transactions you conduct on an electronic payment platform. For example, if a friend sends you money through Venmo to help pay for a dinner out or your mother sends you some spending money.

Lastly, the 1099-K reporting rule does not apply to any transactions made through Zelle. That's because Zelle is a payments clearinghouse that connects the payer's bank account directly to the receiver's bank account. "Zelle facilitates messaging between financial institutions, but does not hold accounts or handle settlement of funds," the company said in a statement earlier this year.

But the IRS may still get reporting on at least some of your business transactions on Zelle, Walker said.

If there is a business-to-business payment over the Zelle network, the business that makes the payment must provide the receiving business and the IRS with either a 1099-NEC for non-employee compensation or a 1099-MISC for other expenses, she explained.

Like the 1099-K, those other forms also provide information to the IRS that will make it harder for businesses to understate their income in a tax year.