Tax Guide: Will the IRS Start Taxing Venmo, Cash App & PayPal Payments?
Whether you’re an individual or business owner, you’ve likely used third-party payment apps such as Venmo, Cash App, or PayPal to send or receive money. These apps have exploded in popularity in recent years due to their convenience and affordability. However, a recent tax law change could make receiving funds on these platforms a bit more challenging.
So, what is the so-called Venmo tax, and what does it mean for your wallet?
Summary of the New Tax Law
The main change is that anyone who receives more than $600 in payments through a third-party payment network will have that money automatically reported to the IRS.
The new law was slipped into the American Rescue Plan in March 2021 and went into effect in January 2022.
It’s important to note that this change only impacts people receiving payments for goods and services, such as small business owners. Those with personal profiles who receive money from family or friends generally do not have to count their transactions as income.
Previously, income reporting was only required for those who received payments above $20,000 a year. Now, if you earn more than $600 in any given year, the payment app you use will report your income on IRS form 1099-K.
What is Form 1099-K?
The third-party payment app will report earnings of $600 or more to the IRS on a 1099-K form, which includes income received by electronic forms of payment. If your payments exceed the threshold, you should receive the 1099-K online or by mail by January 31st.
If you received payments of more than $600 in a year but didn’t receive a 1099-K form, contact the payment processing app right away. Not submitting all of your income information with your tax return could result in tax penalties and other added fees.
So What Counts as Income?
Not all money you receive on Venmo, Cash App, or other third-party payment apps is reported as income to the IRS.
Here are a few examples of payments that generally don’t count as income for tax reporting purposes:
Payment from a friend to reimburse you for dinner or other shared expenses
Payment from your roommate for their share of the rent
Cash received from a family member as a gift
However, if you use payment apps to receive money from selling goods or services, this is reportable income and must be documented on your tax return.
What About Zelle?
If you use Zelle to send or receive money, you’re in luck since payments received through Zelle do not need to be reported. Zelle doesn’t meet the IRS’ definition of a third-party payment network because Zelle doesn’t directly handle the settlement of funds. Instead, it is the messenger between a financial institution and its customers making payments on the platforms.
The Bottom Line
Even with the tax changes, third-party payment apps such as Venmo, Cash App, and PayPal are still convenient and affordable ways to send and receive money.
Though it may seem overwhelming, we hope this guide has helped you understand the new law so you can prepare for the changes and minimize the impacts.