New Tax Rule for Venmo and Payment App Users

In late 2021, PayPal Corporation, owner of the popular payment app Venmo, announced that it was adding a small fee for business transactions conducted through the app. An individual sending money on the app is prompted to indicate if the funds are for a good or service. If the funds transferred are, 10 cents plus 1.9% is deducted from the total selling price. The fee and several other features was implemented for business owners using the app. These changes were designed specifically for those that use Venmo to receive payments for their trade or business in order to help them keep track of the money exchanged in the app for tax reporting purposes. Other payment apps followed suit, marking one of the first major steps in tax-minded updates for business owners using apps like Venmo.

Beginning January 1, 2022, payment app providers, such as Venmo, CashApp, and others, were required by law to provide a Form 1099-K to users (as well as the Internal Revenue Service (IRS)) that reported 200 or more business transactions totaling at least $20,000. The updated tax law, effective January 1st for tax year 2022, now requires these forms to be sent to individuals with just $600 of business sales. These forms give small business owners a much more direct way to report their sales by way of payment apps, and the lower threshold means that more users will be able to utilize the provider-issued 1099s. Recipients can expect their 1099s to be sent out in early 2023 in time to be filed with their 2022 taxes. Not everyone who uses Venmo or CashApp will receive these forms – the $600 threshold is only applied to payments that are designated as a business transaction by the payor.

Due to these updates, there has been a push from payment app providers to educate their users on the changes, from defining a “business transaction” to offering guidance on reporting their 1099. The FAQs section of these apps are a great resource for business owners to read about what features are available to them. Since providers rely on users to identify business transactions, education is important, not only for business owners receiving payments, but for those sending them as well.

Payment apps are not the only service providers facing changes with the new IRS ruling. Airbnb hosts and artists using Etsy are also subject to the new $600 reporting threshold. Users from these platforms can also expect to receive a 1099-K for the 2022 tax year.

It is important to note that not all payment providers are subject to these rule changes. For instance, the Zelle Network, which uses direct transactions between US bank accounts to transfer money, is exempt from the new reporting requirements. Parent company Early Warning released this statement regarding the changes: “The law requiring the issuance of forms 1099-K applies to third-party payment networks that handle the settlement of funds. Payments between friends and family, and eligible small businesses sent through the Zelle Network are not subject to this law because Zelle facilitates messaging between financial institutions but does not hold accounts or handle settlement of funds.”

Regardless of a specific platform’s requirements, small business owners still need to be mindful to report any payments received for goods or services. The new IRS reporting requirement is a great step forward in making this easier and more straightforward for individuals who utilize payment apps. The most important thing for business owners is to keep accurate records of all transactions, and if there is any uncertainty in what or how to report your earnings for the year, please reach out to your tax professional.