How To Avoid Accidentally Paying Tax on Money Received through Zelle

Mandatory Credit: Photo by Thiago Prudencio/SOPA Images/Shutterstock (11912267i)In this photo illustration a Zelle app seen displayed on a smartphone with the Zelle logo in the background.
Thiago Prudencio/SOPA Images/Shutterstock / Thiago Prudencio/SOPA Images/Shutterstock

Since the Internal Revenue Service reported that third-party payment processors will be responsible, starting in 2022, for reporting payments issued on a 1099-K form, people who use these platforms to exchange money with family and friends were concerned about the tax ramifications. Nearly every platform, including PayPal and Venmo, make it possible to process transactions as “friends and family” to avoid being accidentally taxed. Zelle, however, does not offer this option. But the good news is that Zelle is not subject to the same reporting laws as third-party payment networks.

See: Ensure Your Venmo Transactions Aren’t Accidentally Taxed
Find: Avoid Tax Ramifications by Ensuring Your PayPal Transactions Aren’t Accidentally Taxed

“Payments between friends and family, and eligible small businesses sent through the Zelle Network® are not subject to this law because Zelle® facilitates messaging between financial institutions, but does not hold accounts or handle settlement of funds,” said Megan Fintland, spokesperson, Early Warning Services, LLC, the network provider of Zelle.

In plain language, that means funds sent through Zelle go directly from the payer’s bank account into the payee’s bank account. That’s the difference between Zelle and third-party payment platforms like Venmo or PayPal, which allow users to hold the funds within the platform.

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“If payments received on the Zelle Network® are taxable, it is the recipient’s responsibility to report them to the IRS. If small businesses have any questions about their tax obligations, we recommend they contact a tax professional,” Fintland added.

She also said that purchases made through Zelle do not come with any sort of purchase protection.

“Zelle is a great way to send money to friends, family, or businesses you trust, such as a personal trainer or babysitter,” she said. “If you don’t know the person or aren’t sure you will get what you paid for, we recommend you do not use Zelle for those types of transactions, which are potentially high risk.”

See: Zelle vs. Venmo: What’s the Difference and Which Is Better?
Find: 5 Ways to Transfer Money From One Bank to Another

Zelle offers fee-free transfer of funds between U.S. bank or credit union accounts. At least one person – either the sender or recipient of the funds – must use a bank or credit union that offers Zelle.

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About the Author

Dawn Allcot is a full-time freelance writer and content marketing specialist who geeks out about finance, e-commerce, technology, and real estate. Her lengthy list of publishing credits include Bankrate, Lending Tree, and Chase Bank. She is the founder and owner of, a travel, technology, and entertainment website. She lives on Long Island, New York, with a veritable menagerie that includes 2 cats, a rambunctious kitten, and three lizards of varying sizes and personalities – plus her two kids and husband. Find her on Twitter, @DawnAllcot.
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