Peer-to-peer (P2P) payment apps like Venmo, Zelle, PayPal, Square Up, and Cash App made it easy to transfer money between friends and family, so it’s no surprise that small business owners started using them, too.
The allure of allowing customers to pay with a P2P app is clear. Many customers already have and use those apps to split a restaurant bill or cab fare with friends, so it’s not a stretch to ask them to pay for your products or services using an app that’s already installed on their phones. Even better, small businesses can avoid hefty credit and debit card transaction fees.
But Venmo tax reporting laws have changed, and this change applies to all other P2P apps too. The American Rescue Plan Act lowered the threshold for reporting P2P network transactions to $600. So, if your business received $600 or more on Venmo, PayPal or another P2P app, those payments will be reported to the IRS and you’ll be held accountable for paying taxes on them.
Since there’s no way around this new rule, it’s important to know more about it and how and when to file your business tax return. We’ll cover all that below.
Why Did They Change the Law?
In April of 2021, the Treasury Inspector General for Tax Administration (TIGTA) issued a report estimating that more than $531 million of taxable transactions aren’t being reported to the IRS because they’re taking place on a P2P platform.
If you accept business payments on a P2P platform, you’re responsible for reporting those earnings on your federal and state income tax returns.
This has always been the case, but most small business owners didn’t receive Form 1099-K from Venmo, PayPal, Stripe or other payment platforms because the threshold for reporting those payments was high.
Before 2022, third-party payment networks were required to report any customers that:
- Made over $20,000 (gross) AND
- Received over 200 separate payments in a calendar year
If your business crossed that threshold, the platform was supposed to send you Form 1099-K and send a copy to the Internal Revenue Service (IRS) as well.
The problem is many small businesses didn’t meet that threshold, so small businesses were collecting payments from customers using P2P apps but not reporting the revenue on their income tax returns, knowing the transactions weren’t being reported to the IRS.
To close that gap, Congress changed the tax code, lowering the 1099-K reporting threshold significantly.
New P2P Tax Reporting Requirements
Beginning January 1, 2022, third-party payment networks must send out Form 1099-K if you receive $600 or more for goods or services via the platform. This change is a result of the American Rescue Plan Act, which was signed into law in March of 2021 by President Joe Biden.
What does this mean for your business? First, you may receive requests for additional information from any third-party payment providers you use to ensure they have everything they need to issue your 1099-K form at year-end. This includes your Social Security number (SSN) or employer identification number (EIN).
Unless you met the higher thresholds in place for 2021 and prior, you probably didn’t get a Form 1099-K from PayPal, Venmo, or other P2P payment platforms for the 2021 tax season (returns filed in 2022). But you may receive one in 2023 for your 2022 business transactions, assuming you made $600 or more.
Some mobile payment apps have also indicated they will update their platforms so that business owners can differentiate between business and personal payments.
This new rule doesn’t create a new tax—you were always required to report all business income to the IRS on your annual tax return. This new tax rule just changes the reporting requirements for third-party networks so the IRS can ensure that all freelancers, independent contractors, and business owners report payments on their income tax returns.
Understanding Your IRS 1099-K Tax Form
Form 1099-K was designed to ensure that online retailers report sales for income tax purposes. It requires credit card companies and third-party payment processors to report the transactions they process on behalf of businesses.
Box 1a of your 1099-K form shows the gross amount of all payment transactions made to you, so it’s crucial to keep your own records of business income and tax deductions. Otherwise, if you rely on your 1099-K for calculating your total business income, you could end up significantly overreporting your income and overpaying your income taxes.
Some examples that can lead to overreporting include:
- Fees, refunds, or other expenses that aren’t reflected on the 1099
- You shared a credit card terminal with another person or business, so your 1099-K includes transactions that don’t belong to you
- You use a payment platform for both business and personal transactions, so your 1099 includes both kinds of payments
- You have two different sources of income (for example, a retail business and a rental business) and use the same P2P payment platform for both
If you use any of these payment platforms for business, it’s a good idea to set up separate business and personal accounts. This will make it easier to track business transactions and document your taxable income if your return is selected for an audit.
If you have trouble figuring out whether your 1099-K for the 2022 tax year is accurate, be sure to discuss it with your CPA or tax preparer. They can help ensure your tax information is properly reported on your return.
Venmo Tax Reporting Change FAQs
Does Zelle issue 1099s?
The new tax reporting law applies to most third-party payment processors, but Zelle will not issue 1099-Ks to its users.
Early Warning Services, LLC, the owner and operator of the Zelle Network, announced that the tax law requiring payment networks to issue 1099-K forms doesn’t apply to Zelle because it doesn’t settle funds. Instead, it provides messaging between a financial institution and the people making the payments.
In other words, while Venmo, Cash App, and other payment apps transfer funds from a buyer to a seller in a transaction, Zelle doesn’t hold money. Instead, it instructs one financial institution to transfer money to another.
If you accept business payments through Zelle, it’s still taxable income you’ll need to report. So it’s important to keep track of your transactions.
Do I Need to Send a 1099 If I Pay Through PayPal?
If your small business pays freelancers or independent contractors via PayPal, you do not need to issue a 1099-NEC for those payments as long as you marked it as a business transaction. PayPal will include those payments on the freelancer or contractor’s 1099-K.
However, if you paid them using PayPal’s friends and family option, you will need to report those payments on a 1099-NEC. PayPal assumes transactions made via the friends and family option are non-business transactions and won’t include them on a 1099-K.
Do Banks Report Automated Clearing House (ACH) Deposits to the IRS?
Typically, no. Banks don’t normally report transactions to the IRS. But there are a few exceptions.
For example, if you make a cash deposit of $10,000 or more, the bank is required to report this transaction to the IRS. The bank may also report transactions to the IRS if it flags your banking activity as suspicious. These reporting rules are designed to help law enforcement combat money laundering, tax evasion, and other criminal activities.
ACH transactions—which are bank-to-bank transfers, including direct deposit transactions—are not considered cash, so banks generally don’t report ACH deposits to the IRS, even if they’re greater than $10,000. However, if the IRS audits your tax return, your bank may have to share information on all relevant transactions with the federal government.
What if I Accept Business Payments Through a Personal Account?
If you collect business payments in a personal P2P platform account, that income will likely still be reported to the IRS. The IRS and the P2P networks themselves are working on better systems for identifying business transactions taking place on these platforms and ensuring all sales of goods and services are reported to the IRS.
That could become a major headache if you accept both business and personal payments through the same P2P platform account. For example, say you own a house cleaning business and collect payments from customers via Venmo, but also use the same Venmo account to collect money from other parents for a group gift for your child’s teacher. Will the app know which transactions are personal and which are business-related? Maybe, but maybe not.
The best way to avoid having personal transactions reported to the IRS is to use separate Venmo accounts for personal and business transactions. However, if you’ve already co-mingled business and personal transactions in one account, make sure you keep detailed records of your business revenues and report the correct amount to the IRS regardless of what your 1099-K shows. That way, if the IRS ever decides to audit your return, you have the records to back up the numbers on your tax return.
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