Earlier this year we discussed a new tax reporting rule regarding online payment apps for paying nannies and babysitters. As we prepare for the 2023 tax season, the IRS has just issued a reminder about this new rule. Our payroll partner, GTM Payroll Services, provides this look at the rule and what families and caregivers will need for filing taxes in 2023.
In sharing tips for the upcoming tax season, the IRS reminded taxpayers about the new tax-reporting threshold when receiving payments through mobile payment apps like Venmo, PayPal, and CashApp.
If you receive $600 or more from these third-party payment platforms for work, side jobs, or selling goods, you’ll get a Form 1099-K in January.
Occasional babysitters and household workers like nannies – as well as the families who employ them – should be aware of the new tax-reporting rule if they are paid (or pay) through mobile apps.
“It’s going to be a new form for a lot of people,” said Adam Markowitz, an enrolled agent and vice president at Howard L Markowitz PA, CPA in Windermere, Florida told CNBC.com. “And the worst thing they can do is ignore it.”
What’s new for tax year 2022
You have always been required to report the income you earned, including from part-time work and side jobs. The American Rescue Plan Act of 2021 just lowered the reporting threshold for third-party networks that process payments for those doing business on their platforms.
Prior to 2022, Form 1099-K was issued for third-party payment network transactions only if your total number of transactions exceeded 200 for the year and the aggregate amount of these transactions exceeded $20,000. Now a single – or multiple – transaction(s) totaling $600 or more can trigger a 1099-K.
Since the IRS also receives a copy of Form 1099-K, the income you report on your tax return should include what’s reported on the form. Otherwise, you may automatically receive an IRS notice or even trigger an audit. Follow the instructions on the form to correctly report this income.
Receiving a Form W-2
There may be some uncertainty for household workers who receive a Form W-2 from their employer and then get a 1099-K from a payment platform because they were paid through a mobile app.
In its Frequently Asked Questions about Form 1099-K, the IRS doesn’t address this issue.
Nannies and other household employees should receive a Form W-2 at tax time. There are different sets of tax rules for families and nannies to follow as opposed to workers who are independent contractors and can receive a 1099.
To avoid confusion at tax time, the best ways to pay a household employee are through direct deposit or with a paper check.
When paying a babysitter
Paying a date night or occasional babysitter by a mobile app may still ok but they ought to know that this income will likely be reported to the IRS and should be included on their personal tax return.
Share this information about the new tax reporting rule with your babysitter so that they are aware of the change and that there will be no surprises for them in January.
Remember this is not a new tax. It’s a new reporting requirement.
Reporting and declaring any income, either personal or through a business, has always been a requirement when filing taxes with the IRS no matter how payments were made or whether a tax form was generated. So even if your babysitter did not receive a 1099-K in previous years, any taxable income received through these payment platforms was required to be reported on their income tax return.
Rule aimed at businesses
This new requirement is aimed at businesses that use these apps to get around banks and traditional forms of reporting income. The IRS wants to make more transactions reportable, so it is harder for businesses to underreport their taxable income. The provision is estimated to bring in $8.4 billion from fiscal year 2021 to 2031.
Money received as personal transactions
Money received through third-party payment applications from friends and relatives as personal gifts or reimbursements for personal expenses is not taxable and won’t result in a 1099-K.
So perhaps an easy way to get around the new rule is to pay your babysitter or nanny as a “personal” transaction like they were a family member or friend. However, payments made on a regular basis will call into question whether those payments were truly made to a family member or friend.
In fact, PayPal, which also owns Venmo, says it will monitor accounts to ensure that personal payments are not being used for the sale of goods and services.
If you use a mobile app, it’s always best to pay your babysitter as a service transaction.
More information
If you would like more information, visit:
New Tax Reporting Rule May Change How You Pay a Nanny or Babysitter – GTM Payroll Services
Should Wealthy Families Fear New Tax Reporting Rule on Mobile Payments? – GTM Payroll Services
New U.S. Tax Reporting Requirements: Your Questions Answered – PayPal Newsroom
2022 Tax FAQ – Venmo Help Center
General FAQs on Payment Card and Third-Party Network Transactions – IRS
Understanding Your Form 1099-K – IRS
For additional questions, consult with a licensed tax expert.
Paying your nanny the right way
Paying your nanny by a payment app and need to switch? GTM Payroll Services can handle paying your nanny the right way through a live check or direct deposit. We make payday easy and will help keep you compliant with tax, wage, and labor laws. Want to learn more? Call (800) 929-9213 for a complimentary, no-obligation consultation with a household employment expert. Or schedule time with us at your convenience.
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