How the IRS Handles PayPal and Venmo Taxes in 2025

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If you get paid through Venmo or PayPal for business or side hustle income, it may be taxable — and the IRS is watching. New reporting thresholds mean more users will receive Form 1099-K in the coming years. This guide explains what counts as taxable income, how to report it, and what to do if you receive a 1099-K by mistake.

Because PayPal owns Venmo, and because the IRS rules are the same for all P2P platforms, these guidelines apply to both PayPal and Venmo.

Are PayPal and Venmo Payments Taxable?

It depends. If you accept payments via PayPal or Venmo for goods or services provided, then yes, this is considered taxable business income.

However, if a friend or family member is just paying you back for a meal purchase, or if you receive birthday money from your tech-savvy grandma through one of these apps, then no, it’s not taxable.

Good To Know

Income earned as a business owner or passive income received through investing or earning interest is taxable — even in your Venmo or PayPal account. But how taxes are reported to the IRS and the requirements for reporting Venmo and PayPal income can vary per person.

IRS Reporting Thresholds for Venmo and PayPal

The IRS passed a law that will require third-party payment apps to report all income of over $600 via a 1099-K form. This is intended for more accurate reporting for businesses that get paid through apps like PayPal and Venmo.

This isn’t happening currently, as the IRS allowed a “phasing in” of the rule to happen over the next several years.

Changes in 2023, 2024, 2025 and 2026

PayPal will report business expenses to the IRS once it passes a certain threshold. A change in the rules for reporting, which came into effect for 2024, lowered the threshold for reported business transactions to $5,000. This means that once you hit $5,000 of goods and services payments on your account within a year, PayPal will report the transactions to the IRS.

1099-K Reporting Threshold Timeline

2023 Reporting Threshold

Before this year, the minimum reporting threshold was $20,000 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 2024.

2024 Reporting Threshold

The IRS implemented a phased approach for reporting payments received for apps like PayPal — with 2024 lowering the threshold to only $5,000. This means payments received on your payment app exceeding this amount will receive a Form 1099-K, which will also be reported to the IRS.

2025 Reporting Threshold

In 2025, the threshold lowers to only $2,500–down from $5,000 in 2024. This means payments received on your payment app exceeding this amount will receive a Form 1099-K, which will also be reported to the IRS.

2026 Reporting Threshold

In 2026, the final threshold amount will be set, with payments exceeding $600 getting reported. This means payments received on your payment app exceeding this amount will receive a Form 1099-K, which will also be reported to the IRS.

What Is Form 1099-K?

IRS Form 1099-K is issued to businesses or individuals that receive digital payments through third-party apps like PayPal and Venmo. If you receive direct payments via credit or debit card for goods and services, or if you receive payments from digital payment apps –you may receive a 1099-K from the app you use.

The 1099-K form is used to report business income to the IRS. Apps like PayPal and Venmo are required to send Form 1099-K if your payments received exceed a certain amount for the year. As of 2024, the payment threshold for getting a Form 1099-K is $5,000, but the threshold drops to only $2,500 in 2025. By 2026, the IRS will require reporting payments once your total received hits $600 or more.

Forms 1099-K will show the total amount of payments received through PayPal or Venmo for the calendar year. This may include a mix of business income and personal payments — so it’s important to keep your own records for tax reporting purposes. 

You can use Form 1099-K to report your business income to the IRS. This may include business income as well as income from selling personal items for a profit, such as flipping garage sale items on eBay. You may not owe taxes on all your income that is reported on Form 1099-K, but the IRS does have a copy on hand, so you’ll need to be able to accurately report business vs. personal income.

What To Do If You Get a 1099-K 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.

Follow These Steps if You Mistakenly Receive a 1099-K

1. Check if it includes only personal transactions. Comb through transactions to ensure there’s no business income deposited to your account. 
2. Contact PayPal or Venmo to reclassify the payment. If it’s all personal transactions, you can email or chat with PayPal or Venmo customer service to reclassify any transactions that they mistakenly reported as income.
3. Do not call the IRS — they won’t fix the issue. While it may be tempting to call the IRS — they can’t help you correct this 1099 form mistake. You must deal with Venmo or PayPal directly.
4. If you can’t get a correction in time, report the amount on your return but zero it out. You might be able to report the income on IRS Schedule C, and then deduct the same amount on your tax return. This will result in $0 in extra taxes owed, but could have other implications. It’s best to work with a tax professional in this situation.
5. Keep records of the correction request. Make sure to digitally document your request for correction of your payment classifications in case you get audited by the IRS.

Potential Problems

If an IRS computer system detects that a 1099-K form was generated for you, but you did not acknowledge it on your return, it 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.

How To Report Venmo and PayPal Income

If you receive business income from Venmo or PayPal, you will need to report this income to the IRS on your business or personal tax return, regardless of the amount. Even if you’re under the $5,000 threshold for 2024 or $2,500 in 2025 and don’t receive Form 1099-K from Venmo or PayPal, it doesn’t mean you’re off the hook.

The IRS requires reporting every dollar you make as business income or profit — so you’ll need to keep track of those transactions for your own reporting purposes. If you do get a Form 1099-K from Venmo or PayPal, not all transactions may be taxable, though, so you’ll need to make sure to review the form and only report what qualifies as business income or profit.

To report this on your tax return, you may end up reporting this income on Form 1040 Schedule C if it’s just a side hustle business or if you’re considered a sole proprietor. If you have an LLC or corporation, you will report your business income on your business tax return.

PayPal and Venmo IRS Reporting Checklist

• Use Schedule C if you’re self-employed
• Report all income, even if under the 1099-K threshold
• Include expenses to reduce your taxable income
• If you received a 1099-K, verify that it matches your records.

What Transactions Are Not Taxable?

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. 

In general, here’s how to treat PayPal and Venmo deposits to your account:

Taxable Payments

• Freelance or contractor payments
• Selling goods or services, e.g., concert tickets, flipping items
• Side hustle or business income

Non-taxable Payments

• Reimbursements, e.g., splitting rent or dinner
• Gifts to friends or family
• Money transfers without goods or services exchanged

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 Happens If You Don’t Report Business Income?

If you don’t report P2P payment app income on your tax return, you could be subject to additional IRS taxes and penalties. 

• You may face a 20% accuracy-related penalty.
• IRS may send a notice if your 1099-K wasn’t acknowledged.
• Repeated underreporting could trigger audits or criminal charges.

Business Deductions Paid via Venmo or PayPal

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 themselves 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.

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 future. If this happens, you won’t likely be able to use the service until you provide the required information.

Next Steps

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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