There’s a lot of misinformation surrounding new IRS cash app rules that went into effect January 1, 2022, and many users worry their transactions on apps like PayPal, Zelle, Cash App, or Venmo will be taxed.

Social media posts, like this tweet that was published on September 15, have claimed that starting January 2022, if you receive more than $600 per year through third-party peer-to-peer payment apps like Cash App, Venmo, or Zelle, you will be taxed on those transactions.

Those posts refer to a provision in the American Rescue Plan Act, which went into effect on January 1, 2022, according to which anyone receiving $600 per year using Venmo, PayPal, Zelle, or Cash App will receive a 1099-K and be required to report that income on their taxes.

The new reporting requirement only applies to sellers of goods and services, not personal payments, like if someone paid you back for dinner.

And it doesn’t apply to the taxes you’re filing this year. It applies to your 2022 taxes, which you’ll file in the spring of 2023.

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“There’s a little bit of confusion over this Venmo rule,” says Steven Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center at the Urban Institute. The idea that any payment received over $600 will be automatically taxed as income is false, he explains. “These [1099-K forms] are just information reports. They don’t themselves determine tax liability.”

The reporting requirement is an effort to reduce the country’s annual tax gap — the difference between taxes owed and taxes paid — which the IRS estimates to be roughly $166 billion per year, not including the tax gap of large corporations. It’s not a new tax and it does not suggest levying a new tax.

Here’s what you need to know and how you should prepare for tax season in light of these new rules.

This new reporting requirement only applies if someone is buying or selling goods and services using a peer-to-peer payment platform, says certified public accountant Sheneya Wilson, the founder and CEO of Fola Financial. If you have a side hustle walking dogs, for example, and you’re getting paid through Venmo, that is taxable income and will need to be reported to the IRS.

But let’s say you sell a couch to someone online for $1,200. As long as you can prove with a receipt that you originally paid more than $1,200 for that couch, that is not considered taxable income, Wilson says.

If you go out to dinner with a friend and send them your half of the bill via a cash transfer app, that transaction is not taxable, either, she says.

If you are earning money on one of these apps though, you may want to consult a tax professional. And even if you have the help of a professional accountant, you’ll want to take these three steps on your own, Wilson says.

1. Print a transaction report
   A lot of peer-to-peer payment platforms allow the user to print transaction reports. Download your transactions for the year.
2. Distinguish your transactions
   Once you’ve downloaded your transactions, determine which ones were business transactions and which were personal. “I have our clients printing their reports so we can format an Excel sheet and they can denote, ‘Here’s revenue, here’s what came from my aunt, here’s what came from my sister,'” Wilson says.
3. Gather your supporting documentation
   Gather your invoices and receipts as supporting documentation to show which transactions were income and which weren’t.

   If money was received as a gift, you may need to explain the relationship between you and the person who gave you the present. The annual gift-tax exclusion for 2021 is $15,000 per donor, per recipient, meaning you don’t need to pay taxes on a gift given that equaled $15,000 or less. If you’re the recipient, you’re typically not subject to gift tax.

   It’s important to note that just showing the IRS a bank or credit card statement doesn’t qualify as a receipt. Wilson suggests creating an email account designated for receiving e-receipts to keep your transactions organized.

Receiving a 1099-K and reporting income from payments received on a peer-to-peer payment system isn’t new: The tax reporting requirement started on 2012, though the threshold then was higher. A seller would only need to report income to the IRS if they had received $20,000 worth of payments per year and there were at least 200 transactions on their account.

However, in January, “the threshold is being reduced dramatically, from $20,000 to $600, with no minimum number of transactions,” Rosenthal says.

Keep in mind that the IRS only cares about your profit, says Howard Samuels, a certified public accountant at Samuels & Associates. Any costs associated with keeping your business up and running can be deducted and help offset your tax burden.

“So if you’re cutting hair on the side, and you made $1,000, and you’ve paid for scissors and combs and hair products, you can deduct all those items against your $1,000,” he says. “If you did advertising, if you do all the hair cutting in your home, you may have a home office deduction.”

The article “Is the IRS Taxing PayPal, Venmo, Zelle, or Cash App Transactions? Here’s What You Need to Know″ was originally published on Grow (CNBC + Acorns).