UPDATE: The IRS has delayed the implementation of this new tax reporting rule. Receiving payment for services via a mobile app won’t generate a Form 1099-K if these payments totaled more than $600 in 2022. The new rule will begin with mobile payments received in 2023. Read more.
The emergence of mobile apps like Venmo, PayPal, and Cash App has made financial transactions easy in any number of situations. Want to send money to your niece for her birthday? PayPal it to her. Need to split the check at dinner? Use Venmo. Paying your nanny or babysitter? A couple of taps on CashApp and, well, that may no longer be a great idea.
A new tax reporting rule may change how you pay your nanny or babysitter.
What’s new for tax year 2022
Under the American Rescue Plan Act (ARPA) from March 2021, paying for goods and services – like babysitting or childcare – through third-party settlement organizations (like Venmo, PayPal, and CashApp) will be reported to the IRS if those transactions total $600 or more in a year.
To be clear, the new tax reporting rule falls on the person being paid (such as a nanny or babysitter) not the one making payments (family).
This rule went into effect on January 1 so the personal tax returns due in April will not be affected. 1099-K forms (Payment Card and Third-Party Network Transactions) for the 2022 tax year will start arriving early next year.
The intent of the 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 new tax reporting rule and paying a nanny
Families that employ household help like – nannies, in-home senior caregivers, and housekeepers – should avoid using mobile payment platforms to pay their workers.
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.
In addition, several states have domestic worker protection laws that require families to issue pay stubs with their nanny’s pay that provide details like hours worked, pay rate, overtime hours, paid time off, and more. Paying a nanny with a mobile app and potentially skipping a paystub would put a family in noncompliance with labor laws.
The best ways to pay your household employee are through direct deposit or with a paper check.
The new tax reporting rule and 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 reported 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 come tax time next year.
Your babysitter will get a Form 1099-K next January if they exceed that $600 threshold for payments made by mobile apps. Previously, a 1099-K would only be issued if your babysitter had at least 200 transactions worth a combined $20,000 or more.
It has always been a requirement to report income when net earnings from self-employment exceed $400. ARPA just broadens the reporting of tax information to the IRS.
What your babysitter needs to know
If your babysitter is frequently paid through a mobile app they may be asked to provide their Social Security Number or Individual Tax ID Number in order to continue using that platform to be paid for their services.
They should keep track of Venmo, PayPal, and other app transactions making sure to separate personal payments from their babysitting pay.
For the 2022 tax year, babysitters will need to consider the amounts shown on their Form 1099-K when preparing their income tax returns. The IRS will be able to cross-reference both the third-party network report and the one issued to your babysitter.
Form 1099-K is an IRS informational tax form used to report payments received by a business or individual for the sale of goods and services that were paid via a third-party network, often referred to as a TPSO (Third-Party Settlement Organization) or credit/debit card transaction. The IRS requires TPSOs, such as PayPal and Venmo, to issue a Form 1099-K, which shows the total amount of payments received from a TPSO in the calendar year if a customer meets the $600 threshold amount.
Again, 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.
Remember this is not a new tax. It’s a new reporting requirement.
Personal transactions are not affected by the new rule
Reporting only applies to payments received for goods and services. Paying back a friend or sending money to a family member as a gift is not subject to the new tax reporting rules.
PayPal and Venmo users can tag their transactions as either personal (when reimbursing or gifting friends and family) or goods and services (when purchasing an item or paying for a service). It is the latter category of goods and services that falls under the new reporting rules.
Using “personal” transactions to pay for services
A seemingly easy way to get around the new rules may be to pay for your babysitter’s services by a “personal” transaction as if they were a family member or friend.
However, if you pay your babysitter on a regular basis, those consistent transactions will raise red flags with the payment platform and 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 sales of goods and services.
It is always best to pay your babysitter as a service transaction.
If you would like more information, visit the following links:
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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