Teens & Taxes: How Can I Be Sure My Teenager Won’t Be Accidentally Taxed on P2P Transactions?
Teens often send money to friends using popular person-to-person payment platforms like Venmo and PayPal. But new tax laws for 2022 could make these transactions trickier from a tax perspective. We often try to teach our teenagers to make smart decisions and pay attention to the actions they take online. It’s worth it to share the new tax laws with them to ensure they won’t accidentally be taxed on P2P transactions in 2022.
One aspect of the American Rescue Plan Act mandates that online payment platforms must report all aggregate business payments of $600 or more to the Internal Revenue Service on a 1099-K form. Previously, users would only receive a 1099-K if they showed $20,000 in income across 200+ transactions through the platform.
But your teen shouldn’t have to pay taxes if their friend reimburses them for pizza or movie tickets using PayPal, Venmo, or other apps. Fortunately, it’s easy to keep the platform from reporting these funds transfers as income: process these transactions as “friends and family.”
How To Avoid Paying Taxes Accidentally on PayPal
If your teen is using PayPal, the person sending them the money should make sure that they click the option that reads, “Sending to a friend.” If your teen sees money come through PayPal and it is listed as money for an item or service, they will want to decline the transaction and reach out to the sender. The sender must click “change,” and select “Sending to a friend” on their settings.
How To Avoid Paying Taxes Accidentally on Venmo
Venmo transactions can also be processed as personal payments. The sender will want to toggle the button that says “Turn on for purchases” to the “off” position. The button will then appear gray, indicating a personal payment.
Unfortunately, if someone accidentally sends your teen money with the “purchase” button on, the only recourse is to have the sender contact Venmo support. Venmo should refund any associated fees and the purchase will not be considered as 1099 income.
Other Safe Ways To Transfer Money Between Friends and Family
A little forethought can go a long way to avoid complications or accidental taxes for your teen next tax season. But you can also suggest that your teen start using the personal Cash app, which does not permit business transactions and, therefore, is not subject to the same tax law.
Similarly, the payment network Zelle is not subject to this tax law. “Zelle facilitates messaging between financial institutions but does not hold accounts or handle settlement of funds,” Megan Fintland spokesperson, Early Warning Services, LLC, the network provider of Zelle, told GOBankingRates previously in an email interview. That means if your teen uses the personal Cash App or Zelle to receive money from friends, they won’t accidentally be taxed on that money as earned income.
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