Payment apps are a convenient way to send and receive money between family and friends. Instead of mailing a check for your niece’s birthday, you can send money to her Venmo account in a matter of seconds.
If you paid the bill for dinner with a friend, your friend can pay back their portion without using literal cash or paper checks. Thanks to technology, ‘IOUs’ have become much easier to settle.
While these apps are great for personal use, there are a different set of rules if you use them to send or receive any type of payments related to a business. This includes “side hustles.”
Any money that is received for goods or services is considered taxable income, and regardless of whether you report it, the IRS will keep of track of how much you’re receiving through PayPal, Venmo, and/or Cash App.
How does that happen? As of the beginning of this year (January 1, 2022), payment app companies are now required to report income to the IRS.
This means that any commercial transactions (i.e., payments that you receive for goods or services that you provide) that come to a total of $600 or more during the year, are going to be reported (by the app companies) as taxable income.
Up until this point, payment app companies were only obligated to tell the IRS when an individual had more than 200 commercial transactions a year, and even then, the total amount had to be at least $20,000 or more.
This big change is part of the American Rescue Plan Act, and was signed into law due to a bill that was passed in March of 2021. The bill was a response to the changes that came about due to the pandemic.
On the IRS website, they explain how to report income that you receive from credit and debit card transactions, which includes mobile apps.
The new tax rules could affect the payments you receive through apps.
Now that the tax rules have changed, Venmo, Cash App, Paypal, and other payments apps have to “file and furnish” a 1099-K form for any individual who receives more than $600 in a year for business-related transactions.
Some people have been concerned about these changes since they use these payment apps to repay a friend who covered the cost of a meal, or to send birthday money to relatives.
Thankfully, this new tax law only applies to payments that are made for goods and services (not personal transactions). For example, if you operate a dog grooming business, and people pay you for your services through PayPal, Venmo, or Cash App, those charges are taxable income.
On the contrary, if your brother bought food for a family gathering, and you want to split the cost and pay for 50% of the food bill, you can send him a payment through one of those apps, and it won’t be considered taxable income for him.
You may be wondering how these payments apps will know the difference. PayPal and Venmo provide a way to distinguish whether a payment is a commercial payment or a personal payment. A user can choose between those two categories when sending a payment.
Additionally, the user can add a note as well, such as “reimbursement for groceries” or “reimbursement for dinner” to show that they are paying someone back for a personal expense.
All in all, the IRS is cracking down on tax evasion when it comes to ‘side hustles.’ If you are providing any type of goods or service (even if you’re not officially an LLC), you still have to report that as taxable income since it’s business-related.
Even if you use a payment platform that allows money to go directly into your checking account (such as Zelle), you are still required to report any commercial transactions to the IRS.
Zelle is not required to report to the IRS or provide a 1099-K form since they’re technically not an app (they’re part of online banking systems), but regardless, you have to report any business-related income that you receive through Zelle when you file your taxes.
So moving forward, be sure to select the proper payment category, and add a note to clarify whether the transaction is personal or commercial.
If your payments in PayPal, Cash App, and Venmo are always related to personal items, such as dinner and movies, you and your friends and family can rest assured that those payments won’t be taxed.
If this information has been helpful, please feel free to share the link to this article to spread the word!
All the best,
Attorney Tracy L. Hirsch
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