Work Shift: Here’s How to Get Read for New Venmo Tax Rules
Your Guide to the IRS Money App Rule
The Internal Revenue Service has delayed its plan to crack down on billions of taxable income dollars that go unreported via payments on apps like Venmo and PayPal. When it takes effect, this effort will result in an avalanche of 1099-K tax forms for people using these services to collect payments for their businesses, but also for all the folks reimbursing each other for personal expenses and selling old belongings on EBay or Craigslist.
The delay — new rules will now kick in for transactions completed in 2023, not 2022 — means you get another crack at setting up your accounts correctly. But you need to do it now.
“This is not a reprieve, or a year off,” says accountant Tom O’Saben, director of tax content and government relations for the National Association of Tax Professionals. “It’s a year of prep.”
The Back Story: Pre-pandemic, third-party payment processors only issued 1099-K tax forms for customers with gross payments over $20,000 and more than 200 transactions. But the 2021 American Rescue Plan lowered that threshold to $600. So whether you receive a payment on a cash app for goods and services or for splitting the check at dinner with friends, expect to receive 1099-K forms for 2023 transactions during next year’s tax season. And it’s up to you to square with the IRS which are taxable income.
What You Want to Avoid: Waking up in January of 2024 to five 1099-Ks for hundreds of transactions — unsure of what’s personal or what should be taxed as income. Here’s how:
1. Christen a personal spending app. “Just make two separate accounts,” says Armine Alajian, CPA and founder of startup business accountancy Alajian Group. “One for business, and one for personal.” And keep it separate to avoid any confusion. Although Venmo lets you toggle between a “business” and “personal” profile, the business profile includes a 1.9% + $.10 transaction fee. PayPal’s business option is similar. If that’s a deal breaker, consider using one app for personal expenses and another for business.
2. Write excellent memos. Your days of sending $40 to a friend with six mysterious emojis just ended. Type out exactly what the expense is for, so that when you receive that 1099-K next January, you have clear records. Example: “$40 to Jeni for lunch at Bravo.”
3. Know that Zelle is a different animal. Unlike its competitors, Zelle facilitates direct bank-to-bank transfers (without holding the accounts itself) — and the company says that it won’t be providing 1099-K forms to customers. Read more about why here. If you use Zelle for personal transactions, this will save you from sifting through every single coffee date or pizza payback from 2023. That said, if you are using Zelle for business payments, remember you are still obligated to report all income totaling over $600 on your taxes. Although Zelle won’t be reporting it to the IRS for you — unlike Venmo and the others — it’s still taxable income.
Caveat: The 2022 tax season could still be messy. “Some people are still going to receive 1099-Ks at the end of the month,” says O’Saben. Companies had already begun the process of sending them out before the IRS pushed the date back by a year. If you do receive a 1099-K, you need to report any income on your taxes, he says — and then adjust your tax return to reflect which income was personal (versus business) so that you aren’t taxed on it. “The theme here is don’t ignore a 1099-K,” he says. For more, here’s the clearest IRS FAQ sheet I’ve ever seen.