Venmo, PayPal and Taxes: What to Know About the Latest IRS Rule Change

Many of us use peer-to-peer digital apps such as Venmo, Zelle, PayPal and others to pay friends and family for things such as our share of dinner. These payment apps also are used frequently for business payments, and your clients might need to know about changes to rules affecting Venmo and PayPal tax reporting.

When and How Are the Payment App Tax Reporting Rules Changing/?

The American Rescue Plan Act of 2021 required payment apps to report transactions for goods and services in excess of $600 to the IRS starting in the 2022 tax year. Under previous rules, the IRS reporting threshold was $20,000 and 200 or more transactions.

The change caused consternation among tax preparers. In mid-December, the American Institute of CPAs sent a letter to Congress urging lawmakers to raise the $600 threshold, saying the new requirements would confuse taxpayers and strain the IRS.

On Dec. 23, the IRS announced that it would delay the reporting change until tax year 2023 “to help smooth the transition and ensure clarity for taxpayers, tax professionals and industry.”

When Do I Need to Report This/?

Whether your client has received a Form 1099-K or not, any income received via Venmo or other payment apps must be reported as income on their tax return, which is due in April. Whether these payments are in connection with their primary occupation or a side hustle, they are considered to be income and must be reported to the IRS as such.

Is There a Penalty for Not Reporting?

The penalty for not reporting all business income received via a payment app is the same as underreporting other business income received by check, credit card or any other payment method. Payment apps are just another way of receiving payments from customers and clients. All Venmo taxes and PayPal taxes must be paid as part of your client’s business taxes.

What Payments Need to Be Reported?

Any payments received in the course of your client’s business activities. Whether they receive payments from Venmo, PayPal and other apps or by any other means, payments that constitute business income must be accounted for and reported correctly. Failure to do so can result in penalties or worse from the IRS.

What Payments Don’t Need to Be Reported?

Payments of a personal nature do not have to be reported as income. Examples include payments received by friends or family as reimbursement for their share of a meal. Payments received as a birthday or holiday gift would also be exempt.

This can get “gray” pretty easily. For example, if you sold a used piece of furniture or similar item and received payment via a payment app, the profit on the sale, if any, is taxable as a short- or long-term capital gain, depending on how long the item was held. If the item is sold at a loss, the proceeds from the sale are not taxable, though you will need to report the purchase price. The IRS discusses these kinds of transactions in detail in a newly updated FAQ.

What Forms Will I Need?

Payment processing apps such as Zelle, Venmo and PayPal are required to send a 1099-K form to anyone to whom they sent $20,000 or more in payments with over 200 transactions. It doesn’t matter how many companies or individuals made these payments to the recipient; the rules state that the requirement to send the form is based on total payments and the number of transactions made from a particular app.

Note that your client could receive another version of the 1099 form from an organization that made a payment to them through one of these payment apps. They will need to be sure that they do not overcount or undercount revenue received.

What if I Didn’t Receive a 1099-K Form?

Whether or not you received a 1099-K form for money received from a payment app, if the payments represent income to your client’s business or other taxable income, they are responsible for reporting this amount.

Even though the amount received from any of the payment apps did not exceed $20,000, they are still responsible for reporting the amount received as part of their taxable income.

In some cases they might have received more than $20,000 in payments from a single app, but the app failed to send the 1099-K form. This doesn’t excuse your client from their obligation to report this income.

Is There Any Way to Avoid These Taxes?

If your client earned revenue from payments received from PayPal, Venmo or other apps, they are obligated to report this income.

If they will be using payment apps for their business, they might consider creating an account with the appropriate payment apps in the name of their business. This will help them keep personal and business transactions separate.

What Can Advisors Do?

As an advisor, you can explain the rules surrounding the recognition of business income. There is no difference in the tax treatment of business-related payments whether they are received via a payment app, a check, electronic transfer, credit card or another method.

Your client may benefit from the services of an accountant who is knowledgeable in the areas of business accounting and taxes. Whether they receive payments from Venmo, PayPal and other apps as part of a side hustle business or their primary business entity, these payments must be accounted for and reported correctly.