Using Venmo and PayPal Now Has Tax Implications—Here’s What You Need to Know
The IRS is updating how P2P payment apps have to report income in 2022. Keep reading to learn more about how these changes affect PayPal and Venmo taxes.
April 4, 2022
This information is provided for informational purposes only, and is not intended to be construed as tax, legal, or accounting advice. You should consult your own tax, legal and accounting advisors before making financial decisions.
Remember the days before digital payment apps? Before these handy apps stepped in to save the day, the challenges seemed endless: splitting a brunch bill between friends, having the right amount of cash on hand to reimburse your roommate for groceries, never mind being prepared with cash to pay the babysitter.
Thanks to digital payment apps, paying a friend or family member only takes a matter of seconds these days.
Unfortunately, things are about to get a bit more complicated. As of 2022, certain peer-to-peer (P2P) payment apps will now be reporting select payments as taxable income to the IRS.
Don’t worry too much, personal payments, like splitting costs with friends, aren’t what is coming into play here. However, if you receive income via one of these P2P apps, here’s what you need to know about Stripe, PayPal and Venmo taxes.
When Reporting Income is Required
So, how will you know if you owe Venmo taxes or PayPal taxes? Simply put, if you’re using one of these apps for commercial purposes, it’s likely this will affect you. A friend paying you back for dinner won’t affect your taxes at all, but if you accept business payments on a digital payment app, you’ll be responsible for reporting those earnings.
As of 2022, P2P payment platforms like Venmo, Stripe and PayPal must report information about their users who receive payments for the sale of goods or services through their platform to the IRS. If you only receive a small amount of income through the app (like a teen babysitter), your income likely won’t be reported by the payment platform.
As of 2021, these platforms only had to report sellers who received both
Over $20,000 in gross payment volume
Over 200 separate payments in a calendar year.
However, as of 2022, the tax reporting requirements for these P2P platforms changed as a result of a provision in the 2021 American Rescue Plan Act—dropping the reporting requirements all the way down to $600. Any user who receives $600 or more in payment for goods and services through a third-party payment network will have that income reported on form 1099-K.
The platform must send users that cross that $600 threshold Form 1099-K and they will also send that same form to the IRS. If a user doesn’t receive a 1099-K, they’re still required to report any taxable income they received through one of these platforms on their tax return.
Who Has to Report P2P Income
Again, it’s commercial payments that are under fire, not personal ones. In practice, business owners, side hustlers and freelancers were always required to report income received through P2P apps. This new change is simply making it more difficult to avoid reporting that income as the IRS can now cross-reference reports from P2P payment platforms against those made by individuals and businesses.
So, how exactly are the P2P platforms supposed to determine what’s a business transaction and what’s a personal one? Typically, these platforms ask the person making the payment what the purpose for their transaction is (business versus personal).
As long as your bestie doesn’t accidentally report those birthday drinks she wanted to pay you back for as a business transaction, you shouldn’t run into trouble here.
How to Manage These Changes
All these changes mean that people receiving income through these platforms will need to keep a good record of income sources and amounts, so they’re prepared to file their taxes accordingly.
These personal records will really come in handy if you are paid by a business through one of these apps and they issue you a Form 1099-MISC for the same income reported on the Form 1099-K you received from the P2P platform they paid you through. You need to be careful and avoid reporting the same income twice which could lead to an unnecessarily high tax bill from the IRS.
If you receive business income through a P2P payment platform, it’s helpful to set up a business account that is separate from your personal account to keep your personal and business transactions separate and organized.
What if You’re The One Making Payments?
The IRS considers making payments through a P2P platform the same as paying cash (which they view as an unsubstantiated transaction). Business owners who use these platforms to pay their service providers must keep additional documentation on hand to support the reason for those payments. Keeping receipts, invoices and expense reports organized is key here.
Let’s say you hire a graphic designer to create a logo for your website and you want to pay them through Venmo. You’ll need to have that graphic designer submit a detailed invoice of the service rendered with the payment amount on it so you can have a clear record that supports the P2P payment.
As a business owner, you should treat any payments you make through a P2P payment app as you would a business transaction that goes through a traditional bank account. If your business receives income via one of these platforms, you need to treat that like the income you receive from a direct deposit and report it accordingly.
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