Increasingly popular peer-to-peer (P2P) payment apps such as Venmo, PayPal, and Zelle have prompted the Internal Revenue Service to do more to track unreported income.
If you accept business payments on a P2P platform, you are responsible for reporting the earnings. The IRS requires payment platforms, including PayPal, Venmo, Stripe, and others, to provide information about customers who accept payments for goods and services through those platforms.
P2P methods are very popular because they are convenient and simple. PayPal, Venmo, and other P2P platforms might make it easy for you to pay for business or personal expenses, but be sure to keep track of all income and expenses to avoid unexpected tax bills or IRS audits.
Tax Implications of Receiving Income Through Paypal and Venmo
In IRS terms, using a P2P payment platform is the same as paying cash, which the IRS views as an unsubstantiated transaction.
Invoices, receipts, and expense reports may be required by business owners in order to support the business purpose of payments made through a P2P platform.
If you are a business owner and receive payments through a P2P app, you will still be subject to IRS Form 1099 reporting requirements and will need to account for any payments.
For the IRS, business income collected through a P2P app is no different from any other type of transaction involving a bank account.
When filing taxes, businesses are still required to report payments received through Venmo and PayPal as taxable income.
Paypal and Venmo Payment Thresholds for IRS Reporting
PayPal and Venmo payments require reporting at a high threshold. IRC Section 6050W requires P2P platforms to report gross payments received for sellers who receive:
1. More than $20,000 in gross payments AND
2. Over 200 separate payments per year.
Under the rules, the $20,000 will be calculated based on the gross payment volume a seller receives for goods or services sold. The gross amount does not include adjustments such as credits, cash equivalents, discounts, fees, refunded amounts, or any other amounts. Furthermore, the reported amount will include any shipping and handling, sales tax, and other fees you receive in your payment.
On the other hand, the American Rescue Plan Act, which Congress passed in March 2021, contains a provision that will implement on January 1, 2022, that requires cash apps like Venmo, PayPal, and Zelle to inform merchants and the IRS about business transactions totaling over $600.
In some US states, merchants are required to report at a lower threshold:
1. Vermont, Massachusetts, Virginia, and Maryland have a $600 USD threshold for payments on sales of goods or services in a calendar year. That is regardless of how many transactions take place.
2. The state of Illinois requires that a total payment volume of $1,000 USD be made for goods or services in one calendar year. There must also be at least four transactions.
The platform will send you and the IRS Form 1099-K for that year early in the following year if you cross that threshold. Even if you do not receive a 1099-K, you must report any taxable income you receive from these platforms on your income tax return.
Keeping Separate Accounts for Your Business
You should open a business account if you receive some or even all of your business income through a P2P payment platform. You will have difficulty separating your personal and business transactions if your business and personal transactions are intermingled. To ensure accurate tax reporting, keep detailed records of all income you earn throughout the year.
A messy pile of personal and business transactions is the last thing you want to deal with if you are audited. It is best to keep a separate cash app account for income-related transactions, with good records of what each transaction was for.
All business income should be reported to the IRS, regardless of how small it might be.
Do you get taxed on Paypal Friends and Family?
PayPal Friends and Family transactions (PPFF) will not be reported to the IRS, only commercial transactions. The platform, however, monitors all transactions as required by government regulation. The system can therefore detect if commercial users are using the PPFF option to evade tax obligations.
Receiving or sending money to friends and family falls under the category of personal payments. You are only liable for taxes on commercial transactions and earnings made through your PayPal account. However, any taxable income you earn through these platforms must still be reported on your income tax return.
Do you have to report tips through Paypal and Venmo to the IRS?
Yes, tips in cash and non-cash, including tips made via P2P apps like Paypal and Venmo, are taxable. Federal income taxes are due on tips unless the total amount is less than $20.
The additional income you receive from tips, whether as an employee or as an employer, is taxed.
Your tax return must include any income you receive through PayPal, regardless of whether it's reported on form 1099.
Helpful resource: Are tips taxable?
Why did I receive a Form 1099-K from Paypal?
Third-party payment processors, such as PayPal (also called "third-party settlement organizations," or "TPSOs" for short), use Form 1099-K to report the payment transactions they process for retailers or other third parties. If a third-party payment processor paid you $600 or more in the previous calendar year, they must send you a Form 1099-K.
To report income transferred using PayPal's service, PayPal and other third-party payment services must issue a 1099-K. Once an account receives $20,000 in gross payments for goods or services with a volume of at least 200 payments, the third-party payment service issues a 1099-K form.
To ensure that the income reported on your behalf to the IRS is accurate, use your accounting records if you receive a 1099-K. By tracking it outside of the P2P platform, you can ensure that you have the information needed to report all of your income.
PayPal will send you a Form 1099-K in January, and you should submit this form to the IRS in March.
Even though users who have received more than $600 through Cash App might receive a 1099-K form from the IRS, this does not mean they should fill it out or report it - unless it is business income.
Reporting 1099 Income
Any income that you receive via PayPal must be included in your tax returns, whether or not it is reported on Form 1099.
|Type of Business||Form|
|Sole practitioner||Schedule C|
|Business Corporation||IRS Form 1120 or 1120S|
|Partnership||IRS Form 1065|
|Informal or Hobby Business||IRS Form 1040 - Line 21 Other Income|
Taking Tax Deductions Against Paypal or Venmo Income
When you file Schedule C for the income you receive from PayPal and other sources, related expenses can be deducted.
You may do this regardless of the amount of income earned or the expenses claimed.
PayPal fees are among the first deductions you can make. They are similar to bank fees, and are an expense of collecting income from clients and other sources.
In most cases, PayPal fees range from roughly 3% on income received from domestic sources to well over 4% on income received from international sources.
Additionally, you may be able to deduct any expenses related to earning income via Paypal or Venmo.
These can include:
- Using your computer or cellphone.
- Renting or using your home for business purposes.
- Purchasing supplies or inventory for your company.
- Purchasing necessary business equipment.
- Travel related to your business.
- Marketing and advertising expenses.
- Internet or web hosting costs.
- Additional expenses required to generate the income.
Helpful resource: The Detailed List of Small Business Tax Deductions
It's likely that at least some of your business expenses are paid through PayPal. You should, however, keep receipts for those expenses. Having them appear in your PayPal account does not make them deductible. To prove the business nature of the expenses claimed, you will need receipts from merchants or service providers.
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