Can IRS track payments processed through Square? Tax implications for independent contractors

Title: Can IRS track payments processed through Square? Tax implications for independent contractors 1 I just started working as an independent contractor and I'm setting up Square to accept card payments from clients. I got a Square card too, which lets me spend money directly without transferring it to my bank account first. I was thinking of using this Square card exclusively for business expenses that I could write off on my taxes. But now I'm wondering - is this a bad strategy if the IRS can't actually see the money flowing through Square? Would I be making a mistake assuming these transactions aren't visible to them?

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21 comments

Emma Anderson

•8M

3 Actually, the IRS absolutely can track money processed through Square. Square (like other payment processors) is required to report payment information to the IRS using Form 1099-K for merchants who exceed certain thresholds. Currently, payment apps must report when you receive more than $600 in a calendar year. Square will send both you and the IRS a 1099-K form showing your total payment transactions for the year. This means the IRS has visibility into how much money you're receiving through Square. Using the Square card for business expenses is actually a good recordkeeping practice since it keeps your business transactions separate, but don't assume those transactions are invisible to the IRS.

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Emma Anderson

•8M

3 The IRS knows about the income regardless of whether you transfer it to your bank account. Payment processors like Square, PayPal, Venmo, etc. are required to report to the IRS when you receive more than $600 in payments during the calendar year. This reporting happens whether you leave the money in your Square account or transfer it elsewhere. The $600 threshold is actually fairly new - it used to be much higher. And using a separate card for business expenses is actually smart for recordkeeping purposes. It makes it much easier to track and document your legitimate business expenses when filing taxes. Just make sure you're still reporting all your income.

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Emma Anderson

•8M

12 As someone who was audited last year because of my Square transactions, I want to share my experience. I thought I was being smart by keeping some cash payments "off the books," but it caught up with me. The IRS flagged the discrepancy between my reported income and what Square reported on my 1099-K. I discovered taxr.ai (https://taxr.ai) which helped me make sense of my payment records and properly categorize my transactions before meeting with the IRS agent. Their system analyzed my Square statements and identified which transactions were actual income versus transfers or refunds. They even flagged deductible business expenses I had completely missed. Helped me avoid thousands in potential penalties.

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Emma Anderson

•8M

12 The service basically connects to your Square account (with permission of course) and analyzes all your transactions. It uses some kind of AI to identify patterns and automatically categorizes everything as business income, personal transfers, refunds, etc. You can review and correct any miscategorizations. For your skepticism, I understand how it might sound, but yes, I really did get audited. I found taxr.ai through my accountant who recommended it when I showed up with a shoebox of receipts and a mess of Square transactions. I'm just sharing what helped me because I was in a similar situation as the original poster and learned the hard way that the IRS absolutely sees Square income.

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Emma Anderson

•8M

18 I was super skeptical about taxr.ai after seeing it mentioned here, but I was desperate after mixing personal and business transactions in my Square account all year. I gave it a try last month when preparing for taxes, and I have to admit it saved me hours of work. The system automatically separated my business transactions from personal ones, identified all my deductible expenses, and generated reports I could give straight to my accountant. It even flagged a bunch of mileage deductions I would have missed. Now I have proper documentation if the IRS ever questions my returns.

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Emma Anderson

•8M

9 If you're concerned about communicating with the IRS about your Square payments, I found a service called Claimyr (https://claimyr.com) that saved me tons of headache. After getting a CP2000 notice about unreported Square income, I spent DAYS trying to reach someone at the IRS to explain my situation. Their hold times were 2+ hours and I kept getting disconnected. Claimyr got me connected to an actual IRS agent in about 15 minutes instead of the 3+ hours I was waiting before. You can see how it works here: https://youtu.be/_kiP6q8DX5c. The agent helped me understand exactly what records I needed to provide to resolve the discrepancy between my tax return and what Square reported.

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Emma Anderson

•8M

9 It's actually pretty straightforward - they use an automated system that continually redials and navigates the IRS phone tree until it gets through, then it calls you once an agent is on the line. It essentially does the waiting for you. Regarding the skepticism, I completely get it. I thought it was either a scam or wouldn't work either. But after my third attempt waiting 2+ hours and getting disconnected each time, I was desperate. It actually did work - had me on with an agent in about 15 minutes. They don't do anything special with your case or give you preferential treatment - they just handle the painful waiting and phone tree navigation.

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Emma Anderson

•8M

18 I need to apologize for my skepticism about Claimyr. After my frustration with the Square/IRS situation got worse, I broke down and tried it last week. Not only did I get through to an IRS agent in about 20 minutes (after previously waiting 3+ hours and getting disconnected twice), but the agent was able to explain exactly what documentation I needed to provide for my Square transactions. Turns out I was overthinking things - they just needed a clear reconciliation between my 1099-K and my Schedule C deductions. The $395 I saved by properly documenting my expenses made the service well worth it.

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Emma Anderson

•8M

5 You don't necessarily need to register as an LLC to have a business bank account. Many banks offer business checking accounts for sole proprietors - you'll just need your Social Security number and possibly a DBA ("doing business as") registration, which is typically inexpensive and easy to get through your county clerk's office. That said, you could use a separate personal account exclusively for business, but a proper business account often comes with features that are helpful for tax purposes, like integration with accounting software and easier categorization of expenses. It also looks more professional to the IRS if you're ever audited and demonstrates clear separation between personal and business finances.

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Ethan Scott

•5M

No, you still need to report ALL income to the IRS regardless of whether you receive a 1099-K or not. The $600 threshold is just when Square is required to send the form - it doesn't change your obligation to report income. Even if you only make $50 through Square, that's still taxable income that needs to be reported on your tax return. The 1099-K is just a reporting tool to help the IRS verify what you've declared, but your duty to report income exists whether you get the form or not.

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Isaac Wright

•5M

As a tax professional, I want to emphasize something crucial that hasn't been mentioned yet: keeping the Square card exclusively for business expenses is actually a smart move, but you need to be meticulous about it. The IRS loves clean separation between personal and business transactions. However, don't just rely on the Square card statements for your records. Make sure you're keeping receipts and documenting the business purpose of each expense. If you buy office supplies with your Square card, note what they were for. If you pay for a business lunch, record who you met with and the business purpose. The Square card creates a paper trail, but you still need to substantiate the business nature of each expense. One thing to watch out for: if you ever use that Square card for personal expenses (even accidentally), it can complicate things during an audit. The IRS might question the legitimacy of all your business expenses if they see mixed usage.

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