PayPal, Zelle, & Venmo Taxes: What Your Business Needs To Know
As a small business owner, or even if you just frequently uses cash apps, you need to know the IRS rules for reporting cash app payments.
Most of us have used a mobile cash app, whether it’s sending money to a long-distance pal or purchasing a used recliner on Facebook Marketplace. In recent years, these mobile apps have grown increasingly popular with small businesses, allowing everyone from shop owners to farmers market vendors to accept payments in a more modern way.
In response to money transfers growing in popularity, the government has stepped in to change tax laws surrounding reporting income from cash apps. Whether you’re a small business owner or just someone that frequently uses cash apps and you need to know the IRS rules for cash app payments, this post is for you. We’ll explore the new cash app tax regulations, what types of transactions are taxed, how to report taxes, and more.
Keep reading to learn more about these upcoming tax changes!
Table of Contents
The New Cash App Tax Regulations
Previously, limits surrounding reporting of income received through payment cards and third-party networks (including cash apps) were pretty lax. Businesses and individuals would only receive a Form 1099-K (Payment Card and Third-Party Network Transactions) if the following two conditions were met:
- Gross payments of more than $20,000
- More than 200 transactions per year
However, the American Rescue Plan has made changes to these regulations. Now, these third-party networks are required to report income for users that have received payments totaling more than $600 for goods and services.
These third-party networks will be required to send Form 1099-K to any user that meets this income requirement. A 1099-K will also be sent to the IRS. This requirement takes effect for the 2022 tax year. That means forms will be sent out on or before January 31, 2023, for transactions that occurred in 2022. These new rules will apply to individuals, partnerships, LLCs, and corporations.
This new rule applies to paying cash app taxes, including on income received through PayPal, Venmo, Cash App, and most third-party payment networks. At this time, Zelle says that since it doesn’t settle funds, the law does not apply to Zelle transactions. Merchant Maverick will continue to monitor any changes and update this post as needed.
Do I Have To Pay Taxes On Venmo, PayPal, & Other Cash App Transactions?
If you are required to file a tax return, you must report all income. Even if you didn’t receive a Form 1099-K in the past, you should have reported the taxable income you received through Venmo, PayPal, and other cash app transactions on your tax return.
The new rules simply make sure that this income is reported. If you receive over $600 in income through these sources, you will receive a Form 1099-K, and a duplicate form will also be sent to the IRS.
You will pay taxes on any portion of funds considered taxable income. To be clear, this new regulation does not add a new tax. If you’ve previously accepted payments and have earned taxable income through Venmo, PayPal, and other cash apps, you’ve paid taxes on these funds in prior tax years. With the new regulation in place, only reporting requirements using Form 1099-K have changed.
Cash App Transactions That Are Taxed
Some of your cash app transactions must be included in your gross income that is reported on your tax returns. Transactions that are taxed include:
- Money received as payment for a service
- Money received as payment for goods sold
Money received as payment for goods and/or services encompasses a variety of scenarios. Someone that rents their vacation home through an online marketplace and gets paid through a third-party provider will be taxed on this income. Likewise, a person that cleans houses or babysits as a side gig and makes over $600 doing so will also receive a 1099-K and have to include this income on their tax return. The same applies to someone that earns revenue by selling items on eBay.
Cash App Transactions That Are Not Taxed
Not all cash app transactions are taxed. Transactions that can be excluded from income include certain kinds of P2P payments as well as other types of payments, such as:
- Money received from a friend as a gift
- Money received from a roommate to pay their portion of the bills
- Money received from a relative as reimbursement
- Money received from selling a personal item at a loss
- Charitable contributions
- Transactions for another business or person using a shared credit card terminal
- Transactions that occurred after buying or selling a business
- The cashback portion of customer transactions that received cash back from credit card purchases
How Do I Report Cash App Taxes?
If you receive more than $600 through cash apps, you will receive a 1099-K in 2023 for transactions that occurred during the 2022 tax year. As previously mentioned, a copy of this form will also be sent to the IRS, so it’s important that you remember to include all income on your tax return to avoid hefty penalties and interest.
In most cases, you will include this income on a Schedule C filed with Form 1040. The forms used may differ based on your business’s legal structure (for example, a Schedule E would be used by S-corporations and partnerships).
Also, keep in mind that the 1099-Ks you receive are gross receipts and may include income that is not taxable. You can exclude charitable contributions, reimbursements, and personal gifts. Additionally, you can lower your taxable income by claiming expenses and deductions further along on your Schedule C.
Do I Need To Keep Records Of My Cash App Transactions?
It is vital that you keep accurate records of your cash app transactions. The 1099-K is an information return and includes the gross amount of all payments received. That means the $20 your friend sent through a payment app for half a meal out together may also be added in with income you’ve made through your business. To accurately calculate the amount that is actually taxable, you must have good financial records.
One of the easiest ways to track your income and expenses is with accounting software. It’s also a good idea to set up separate third-party payment accounts for business and personal use to make it easier to identify business transactions.
Some of the documentation you should keep for your records includes accounting software reports, bank statements, receipts, and tax forms.
The Bottom Line On Zelle, PayPal, & Venmo Taxes
The new cash app regulation put in place under the American Rescue Plan seems intimidating. However, it’s important to understand that this isn’t a new tax. Instead, reporting requirements for third-party payment services and apps such as Venmo and PayPal for taxes have changed. The only difference that you should see in 2023 is a 1099-K in your mailbox if you received more than $600 for goods and services paid for through these apps.
Even if you didn’t receive a 1099-K in the past, any income you received through these apps for goods and services should have been reported to the IRS. This new regulation ensures that this income is reported, so make sure that you keep accurate records and report all income sources on your tax return to avoid paying penalties and interest for underreporting.
Also, keep in mind that your 1099-K is essentially a gross receipt that does not include deductions or expenses that you or your business has incurred. Check out our other tax season content, including our guide to small business tax deductions, to lower your tax liability to the IRS. Good luck!