How To Handle Your Taxes When You’re Paid Through Venmo, PayPal and Others

Venmo vs Paypal smartphone apps on display screens
YASTAJ / Shutterstock.com

Electronic payment processors like Venmo and PayPal have rapidly evolved over the past few years. Whereas most transactions used to remain relatively private, things officially changed this year on Jan. 1. As of that date, payment apps are required by law to report business transactions of at least $600 to the IRS. For many gig workers, this means that payments that used to fly under the radar — even though they were always taxable — are now out in the light of day. So, what does this mean for your taxes going forward if you are the recipient of these types of payments? Read on to know exactly how to handle your taxes when paid through Venmo, PayPal and others.

Check Out: Tax Mistakes Everyone Makes — and How To Avoid Them
Advice: 3 Tricky Tax Filing Issues — And How To Handle Them

Payments Made From Friends

The good news is that nothing has changed in terms of receiving money from friends and family. For example, if you go out to a restaurant, pick up the tab and have your friends pay you back via PayPal, those payments are not reported to the IRS. In the past, some companies would make payments to vendors or clients while using the “payment to friends” mode, but that’s not how they should be labeled. True payments for work should be marked as business payments, with the sender deducting the payment as a business expense and the recipient labeling it as income on their tax return.

Make Your Money Work

Business Payments

Business payments received via services like these must be reported to the IRS as income, even if they fall under the $600 threshold. Since some recipients were not properly reporting even larger amounts to the IRS, the law has now changed in 2022 so that the payment processors themselves will report them to the IRS. If you had received such payments in the past, you should have reported them as income to the IRS and paid the appropriate taxes on them. But now, those who avoided declaring this income in the past are simply out of luck. The IRS now has a record of those payments and will match it to your return. In short, if you fail to report the income, the IRS will catch it, and you’ll be assessed fines and penalties — and perhaps even criminal charges in egregious cases of fraud.

Tax Checklist: See the 5 IRS Forms You’ll Need To Get Your Refund

Schedule C of Form 1040

If you receive payment for services via Venmo, PayPal or other processing services, you technically run your own business. As such, you’ll report this income on Schedule C of Form 1040. On the plus side, as this is declared business income, you’ll also be allowed to take deductions for business expenses off from this income. For example, if you work three hours a week serving as an English tutor for overseas adults, you may be able to write off the cost of your computer, headset or other communications equipment you need to perform that job. Of course, you should consult with your tax advisor to see exactly what is allowed and what is not. If you use a headset both for your side gig and your personal life, for example, you won’t be allowed to deduct the full cost of that equipment on your taxes.

Make Your Money Work

Self-Employment Tax

One of the downsides of working a side gig is that self-employment tax may be due on that income. As described above, although you may not think of yourself as a self-employed worker, the IRS requires you to file a tax return as such if your net earnings from this type of employment are more than $400. Self-employment tax is in addition to any ordinary income tax you may owe on your earnings and consists of contributions to both Social Security and Medicare. As an employee, you may have noticed this 7.65% tax on your earnings. What you may not know is that your employer pays the other half of your self-employment tax, which is an additional 7.65%. But if you’re self-employed, you’re technically both an employer and an employee, meaning you personally are required to pay both halves — or 15.3% total — on your net self-employment earnings, minus certain deductions.

More From GOBankingRates

Share this article:

Make Your Money Work

About the Author

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.
Learn More

Untitled design (1)
Close popup The GBR Closer icon

Sending you timely financial stories that you can bank on.

Sign up for our daily newsletter for the latest financial news and trending topics.

Loading...
Please enter an email.
Please enter a valid email address.
There was an unknown error. Please try again later.

For our full Privacy Policy, click here.