Should Wealthy Families Fear New Tax Reporting Rule on Mobile Payments?

Jun 3, 2022 | GTM Blog, Household Payroll & Taxes, Tax & Wage Laws

A new tax reporting rule on mobile payments – aimed at businesses that underreport their income – may be having an unintended impact on wealthy families. Here’s why and how household employers should respond.

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.

A new tax reporting rule for 2022 intended for businesses that underreport – or fail to report their income – is “ensnaring a surprising demographic: the wealthy.”

Lower threshold for reportable mobile app transactions

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.

Form 1099-K will be issued next January if a household employee or babysitter exceeds that $600 threshold for payments made by mobile apps. Previously, a 1099-K would only be issued if they had at least 200 transactions worth a combined $20,000 or more.

How the wealthy may be impacted by new reporting rule

A recent article from Accounting Today (free account required to view the entire story) details how the new rule may impact wealthy families.

While the intent of the rule is aimed at businesses that use these apps to get around banks and traditional forms of reporting income, household employers and their workers need to understand the implications. The IRS wants to make more transactions reportable, so it is harder for businesses to underreport their taxable income.

With money becoming more digital and harder to track, the IRS is more focused on income that goes unreported. Dickinson Colleges estimated this “shadow economy” at around $2 trillion in 2017. At a tax rate of 25%, that’s $500 billion in tax revenues for the IRS’ coffers.

So what does this have to do with families who employ nannies, senior caregivers, and housekeepers or join nanny shares?

Household employers tend to be higher income and may be using apps like Venmo to pay their domestic help.

With the new rule, the affluent are “now on the radar,” Ken Eyler, the CEO of Aquilance, a financial bookkeeping and bill payment firm for high-net-worth families, told Accounting Today.

As the article notes, nannies and other household workers who earn $2,400 or more are domestic employees, and families are required to pay employment taxes like Social Security, Medicare, and unemployment among other requirements.

Notwithstanding the three-figure threshold, rich people are also impacted because they routinely use cash-transfer apps to pay hefty sums to their nannies, babysitters, gardeners, cooks, personal assistants and repairmen, wealth advisors say.

Using “personal transactions” to pay for services

To get around tax laws, families may try to pay their nanny by a mobile app. That has now become a lot harder to do with the new reporting requirement.

A seemingly easy way to get around the new rules may be to pay for your nanny’s or babysitter’s services by a “personal” transaction as if they were a family member or friend. While the “friends and family” channel is not reported to the IRS, if you pay your nanny 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.

And then, as Accounting Today asks, what if a nanny, who was being paid under the table through a mobile app, reports their income?

“Now there’s a reported trail back to that family,” Eyler said, adding that the IRS “looks for hot-button things, and employee issues are a hot-button thing.”

How should household employers respond?

“Your clients [families] with household help should avoid using mobile payment platforms to pay their workers,” wrote GTM Payroll Services Founder & CEO Guy Maddalone in a previous article for Accounting Today. “The best ways for you [accountants] or your clients to pay their household employees are through direct deposit or with a paper check.”

The new rule, [Director of Legacy Wealth Planning at SEI Private Wealth Management Steve] Wittenberg said, “will create administrative burdens.” It will also, he added, “increase audit risk to both payers and receivers.”

More information on new tax reporting rule for mobile app payments

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.