PayPal and Venmo Taxes: Everything You Need to Know
If you use peer-to-peer (P2P) payment apps like PayPal and Venmo, you may be wondering how they fit into the bigger picture when you’re filing your taxes. Here’s everything you need to know tax-wise about P2P platforms, including the recently adjusted IRS reporting requirements.
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Because PayPal owns Venmo — and because the IRS rules are the same for all P2P platforms — these guidelines apply to both PayPal and Venmo.
Do You Need To Pay Taxes on PayPal and Venmo Transactions?
The IRS does not require you to report personal transactions, such as splitting a bill with friends. However, if you use PayPal or Venmo to receive payments for goods or services, these are classified as business transactions and are taxable income.
PayPal’s separate category for goods and services transactions includes business income, and it also includes transactions for things like selling personal items or buying concert tickets. The IRS requires you to report and pay taxes on all business income you receive through apps like PayPal or Venmo.
Does PayPal Report Your Transactions to the IRS?
PayPal will report business expenses to the IRS once they pass a certain threshold. A change in the rules for reporting, which came into effect in January 2023, lowered the threshold for reported business transactions to $600. This means that once you hit $600 of goods and services payments on your account within a year, PayPal will report the transactions to the IRS.
2022 Reporting Threshold
Prior to this year, the minimum reporting threshold was $20,000 dollars and at least 200 transactions within a calendar year. In 2021, the American Rescue Plan act amended sections of the tax code to lower the reporting threshold. This change was initially meant to go into effect in 2022, but the IRS later declared that the year would be treated as a transition period and the changes would go into effect in 2023.
Users with more than $600 of goods and services transactions during the past calendar year will receive the form 1099-K, which will list these transactions, including the ones reported to the IRS by the PayPal and Venmo.
The Difference Between Reported Income and Taxable Income
While the range of goods and services transactions that platforms like PayPal or Venmo will report to the IRS is broad, it does not mean that every reported transaction was taxable. PayPal recommends that users go over their reported transactions with a tax professional to determine which transactions are taxable and which ones are not.
What Does This Rule Change Mean for You?
For most people, the lowered reporting threshold should not cause any changes in how they use PayPal or Venmo. You were always required to report business transactions to the IRS for taxation purposes. The only difference is that now, the P2P payment platform is also required to report your transactions.
If you have not already submitted personal information, like your Social Security number or Tax ID, PayPal and Venmo may require you to submit anything missing in the near future. If this happens, you won’t likely be able to use the service until you provide the required information.
What if You Received a 1099-K Form by Mistake?
Since only business transactions are meant to be taxed on PayPal and Venmo, users who only use the app for personal transactions should not receive 1099-K forms. However, if PayPal’s systems misclassify your transactions as business income, the platform may send you a 1099-K form by mistake.
In fact, as reported by CNBC, some tax experts say they expect many of their clients to incorrectly receive 1099-K forms for personal transactions. Opinions on what to do if you receive the form by mistake vary.
The IRS states that users who receive 1099-K forms for personal transactions should contact the platform in question to reclassify the transactions. You shouldn’t contact the IRS itself, because it won’t be able to change the situation. Once you contact PayPal or Venmo, they should correct the error and send you updated forms.
Tax Expert Guidance
However, some tax experts recommend that you instead acknowledge the 1099-K form on your tax return. An option would be to report the transactions as both expenses and proceeds to zero them out. On a 1040 Schedule C form, this would mean reporting your transactions both under “expenses, other” and “gross receipts or sales”.
One advantage of this second approach is that you don’t need to wait until the platform sends you updated 1099-K forms. IRS systems will note that the form was acknowledged on the return.
If an IRS computer system detects that a 1099-K form was generated for you, but you did not acknowledge it on your return, they may flag your tax filing. Once you receive an automated notice, you will have to get in touch with the IRS, which could take some time. Therefore, acknowledging the 1099-K form on your returns could be a good idea.
If you receive a 1099-K form by mistake and are unsure of what to do, consider contacting a local tax professional for help.
Expensing P2P Payments
If you use platforms like PayPal or Venmo to pay for services you would later like to expense, be aware that the government does not consider PayPal or Venmo goods and services payments as proof in and of itself that the transaction was a business expense. This is what’s called an unsubstantiated expense.
The IRS requires business owners to have another form of proof, such as an invoice or receipt. This proof must contain the amount and date paid and a description of the business expense.
While Venmo and PayPal taxes may seem slightly overwhelming at first, most people, including most business owners, will not experience a significant change from the new rule. When dealing with tax issues, the best and primary solution is to talk with a tax law professional to ensure you are on the right track.
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- CNBC. 2022. "Tax pros ‘expecting the worst’ with Venmo, PayPal tax reporting change. How to handle a 1099-K for personal payments."
- Internal Revenue Service. 2023. "Understanding Your Form 1099-K."
- PGH Certified Public Accountants. "Tax tips for P2P payment platforms."