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What are the new tax rules for small businesses?

The American Rescue Plan Act, enacted by Pres. Joe Biden and the U.S. Congress, will not change how much you are obligated to pay, at least in theory. They will, however, impact how you report. This could, in turn, impact how much you pay.

What are the New Tax Changes?

With new rules to the tax code, small business owners and freelancers who receive payments through a digital service will be required to report this income to the IRS if the amount if more than $600 in total during the course of a full year. Previously, the requirement was to report if you earned $20,000 or more over at least 200 transactions. 


This change, to be honest, will have little impact on most business owners. Small business owners are already required to report their incomes to the IRS. However, it’s not unheard of for small payments to remain unreported. With the new changes, you’ll essentially need to be more detail oriented and report all financial transactions, even smaller payments that come through a third-party service like PayPal.


Because of the tax change, the IRS will be better able to find out how much a business has earned. 


What types of businesses should be attentive to these changes? Any business that sells on Etsy, Amazon, or eBay, as examples, should be aware of these changes and make adjustments to report this income and save for a potential change in tax requirements. You can expect a 1099-K form, which will likely arrive after January 31st, 2023. This form will come from the payment service you are using and will cover payments you have received in 2022. So if you are currently doing business on Amazon that will be more than $600 for the year, Amazon should send your 1099-K form. 


Reporting this income has always been a requirement when filing your taxes, but the American Rescue Plan Act simply widens the reporting that is required. It is, in fact, a major jump. Previously, you had to reach the $20,000 threshold in order to have to report this income, but now it is much lower. Under the new rules, as soon as you reach $600, regardless of the amount of transactions, you’ll need to report this information in you 1099-K. 


The nature of your business, in this case, really doesn’t matter. From small side-hustles to large companies that sell wares online, if you sell to or serve customers online, you need to be prepared for these changes. 


What Will be the Impact on My Business? 

The impact on your business will be minimal. In fact, many small businesses won’t be impacted at all, as they are already reporting these transactions. Others, however, will notice new communications and document requests from their payment services. In the coming months, you could see new requests for tax information, such as a social security number or a tax ID number. 


For example, PayPal has issued a press release that outlines the potential changes to people who operate on their platform. They say that people will be asked for tax information if it has not been provided already. The press release says that this request will ensure you can continue using your account and receiving services. 


Although it may not impact a small business, it’s important to note that these changes are only for payments on goods sold and services rendered. It does not impact gifts or other payments between friends and relatives. Being repaid by your uncle for dinner through your PayPal account, for example, will not be included in your $600 total. 


When Will They Take Effect? 

These changes won’t impact your business until after 2022, but it’s important to keep them in mind now, as you may have a larger tax burden because more income is being reported. In the spring of 2023, you should see the impact of the new tax laws for the 2022 year. 


So, arguably, they actually effect your business now because you need to be diligent about recording transactions and keeping records for the 2023 tax season. 


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Tom Quinn |
Tom (he/him) is a growth marketing manager at Snagajob helping small businesses find hourly workers.