Important Tax Changes to Payment Apps

Introduction

Many child care providers accept payments using convenient payment applications like Venmo, Cash App, or PayPal, from parents to pay for services.

However, there are significant changes to how and when these payments will be reported to the IRS starting with the 2024 tax year and childcare businesses should start preparing in January for the 2024 changes. Earlier this year, Tom Copeland shared a post about the original interpretation of the changes, which had been slated to begin with the 2023 tax year. A brief post on Tom Copeland’s blog updating the 2024 IRS changes can be found here, this guide will expand upon that post and explain the implications for your business.

What are the changes?

Form 1099-K was created by the IRS ten years ago to report revenue from payment cards and third-party network transactions. This includes credit cards, and debit cards, but also includes third-party payment networks, typically referred to as “cash apps.” Some of the more popular apps are Venmo, Cash App, and PayPal.

Until recently, businesses would only receive a 1099-K if they had either over $20,000 in-app payments or over 200 transactions within a given tax year. However, these rules have changed for the 2024 tax year. Beginning in 2024, you, and the IRS, will receive a 1099-K if you have over $5,000 in-app payments per app. This amount is in the aggregate, meaning that if you receive several smaller in-app payments that amount to $5,000 or more in a single app, you will receive a 1099-K.

This is important for two reasons. First, providers who were unaware that cash app revenue had to be reported on their taxes will receive a 1099-K for the 2024 tax year if they receive $5,000 or more per payment app. Previously, some child care providers had the incorrect understanding that if they didn't receive a 1099-K from these cash apps, they did not have to report this income. However, this income did (and does) need to be reported, and now, app payment companies will be sending this information to the IRS so they will know exactly how much businesses have earned through these apps. Second, providers who use a single cash app account for both business and personal use may end up with a mix of personal and business payments listed on their 1099-K.

How does this affect my taxes?

The new 1099-K rules will not change your tax liability. Any child care business is required to report all their income whether it is a subsidy, credit card payment, cash app, or cash. What does change is that starting in the 2024 tax year the IRS is now going to have a record of the payments that you have received through these apps. This means that child care businesses will want to make especially sure that they are clear on what revenue they have flowing through these apps and be diligent with their record-keeping around it to ensure that they are not caught off guard come tax time.

What does this mean for my business?

Child care businesses should ensure now, more than ever, that they are keeping very clear and comprehensive business records. It may be tempting to wait until tax time to review your finances but doing this now gives you extra time to answer questions around certain payments, or ask for corrections from payment app organizations if needed. We recommend that you review your payment app transactions now so that you have plenty of time to take action.

This is a good time to make changes in how you track your payments. Here are a few ways to do so. The easiest way, and the one we recommend, is to create separate payment app accounts for your business. Many of the payment app companies now have business accounts that you can use for your child care business. You (and the payment app company) are clear about which payments are specific to your business. With a dedicated business payment app account, you can be certain that all the payments received through the app are appropriately allocated to your business.

Another way to keep track of business payments is to tag them. Many of the payment app systems let you tag a payment as business or personal. If neither having a business payment app account nor annotating the payments is possible, you’ll want to make sure you're keeping some record, even if it's on a simple spreadsheet that clearly shows which costs are allocated to your child care business.

If you do find that your 1099-K includes personal, as well as business payments, you should reach out to the app payment company and ask for a corrected 1099-K. Their contact information should be shown on the lower left side of the 1099-K form.

What else should I know?

It’s important to note that Zelle, another popular payment company, has determined that they are not subject to these new regulations since they function as a communications tool between financial institutions. What this means is that Zelle users will not receive 1099-Ks. However, these payments should still be accounted for and included on your taxes, so Zelle users may want to consider a Zelle business account to help track business payments.

It is also worth noting that there are a number of how-to videos on social media platforms on converting your business app payment account into a personal one to avoid these new reporting rules. Tactics like these are likely to cause you more hassles in the long run, this income is still attributable to your business, and attempting to circumvent tax rules and regulations could result in accusations of fraudulently misrepresenting the nature of the payments made to you.

What should I do next?

If you wish to continue to use payment apps as a way to accept payments, we strongly recommend that you set up payment app business accounts that are exclusive to your childcare business, especially if you're using any payment app on a regular basis. If you cannot do this for any reason, make sure you are properly annotating all payments or recording them in some way so that payments to your business are very clearly listed and not confused with personal payments that should not be included in your revenue.

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