Tax Changes for Users of Payment Apps

Online payment apps such as Venmo, Zelle, PayPal and Cash App have made it easier–in an increasingly cashless and contactless world–to give money to others.  Businesses have caught on too, using these payment apps more and more for convenience.  More than 2 million merchants use Venmo alone!  And according to a recent consumer retail survey, 47% of consumers would be more willing to shop in-store if the retailer offered contactless payment options.  Payment apps aren’t going anywhere.

Here’s the rub: some businesses using these apps aren’t reporting all of their income from the sale of goods and/or services to Uncle Sam.  And Uncle Sam objects!

New reporting rules take effect January 1, 2022 as part of the American Rescue Plan passed earlier this year.  Under the prior rules, the IRS only required third-party payment apps to report payments to a vendor if 1) gross payments exceeded $20,000; AND 2) the vendor had more than 200 transactions within the current year.  The new provisions require payment apps to send users Form 1099-K for electronic transactions.  It is expected that these payment apps will soon request additional information from its users, including Employer Identification Numbers, Taxpayer Identification Numbers, or Social Security Numbers.

Some good news: we don’t have to worry about the new rules just yet.  The new reporting requirement will only impact 2022 tax returns, filed in 2023.

Do Non-Business Users Have to Pay Taxes under the New Rules?

Many users simply use Venmo or other payment apps to reimburse friends or family for expenses, to settle up a bar tab, or to send gifts. Do they have to pay taxes too?

More good news: No.  The new rules don’t create a new tax; they merely change the reporting requirements that exist under current law.  A 1099-K may report taxable income as well non-taxable receipts. If a user is using a payment app for its business, or if a user is otherwise selling goods or services and being paid through the app, the income is taxable.  Again, this isn’t a change in the law.  Users who receive a 1099-K that reports no taxable income do not have to pay taxes on those receipts.  

No Change in the Law, Just the Reporting. Smooth Sailing, Right?

In theory, the only people who should be concerned with the new rules are those who were not properly reporting their business income in the first place. However, there will undoubtedly be some unintended consequences of these changes, namely the confusion and difficulty for users/taxpayers who have to explain to the IRS why 1099-K income shouldn’t be taxed (remember the bar tab?).  And what about freelancers or independent contractors who who get a 1099-NEC or 1099-MISC in addition to the 1099-K for receiving payment through an app? Unfortunately, the taxpayer will bear the burden of proving to the IRS that these 1099s are for the same transaction.  Hopefully the IRS is ready for the hassle and blowback.

Good Record Keeping is Key.

As has always been the case, maintaining good records for receipts and income is extremely important. If you have a business (whether with a separate EIN/TIN or not), you should establish separate Venmo, Zelle, or PayPal (etc.) accounts for your business and your personal use. Some may even consider avoiding using the apps for personal transactions, so as to avoid any difficult conversations with the IRS (though this may be a nonstarter for many).  Either of these strategies will make it easier to keep track of business receipts and determine your income come tax time.

If you’d like to speak with us on strategies for your small business, or you need a qualified referral to a tax pro, please contact us. Let’s Talk.

Share this post:

Houck Menninger Law, LLC (“HM Law”) has placed the information on this website as a service to the general public. Use of this website does not in any manner constitute an attorney‐client relationship between HM Law and the user. While the information on this site is about legal issues, it is not intended as legal advice or as a substitute for the specific advice of your own attorney. Anyone seeking specific legal advice or assistance should retain an attorney. This website may also include inaccuracies or typographical errors and may not otherwise be up-to-date.

© 2023 Houck Menninger Law, LLC