- Sites like Venmo and PayPal now must report business transactions to the IRS when they total $600/year.
- Congress updated the rules in the American Rescue Plan Act of 2021.
- The tax-reporting requirement doesn't apply to personal payments.
Since the beginning of the new year, Venmo, PayPal, and other so-called peer-to-peer payment platforms are required to report income to the IRS if a user accumulates at least $600 in business transactions a year.
Previously, the reporting requirement kicked in if someone received more than $20,000 from at least 200 business transactions annually.
Congress changed this rule in the the American Rescue Plan Act of 2021, a COVID-19 relief bill that was passed in March. Prior to tax season, affected platform users will receive a 1099-K, which includes the total dollar value reportable transactions, per the IRS.
The new rule is explicitly intended for commercial transactions. "This doesn't include things like paying your family or friends back using PayPal or Venmo for dinner, gifts, shared trips," PayPal said in a November statement about the change.
The sites have attempted to make the business/personal transaction distinction clear: In July 2020, Venmo piloted "Business Profiles" which had more transparency and a transaction fee, according to TechCrunch. PayPal has had a business option at least since 2013; Cash App, another popular platform, has a business profile known as Cash App For Business.
This means users can self-identify what is a commercial transaction or not via the business profile.
In reality, however, nothing is really stopping users from using a personal account to run a business and avoid taxes, says Jennifer Berman, CEO of MZQ Consulting. It's similar to how people skip reporting income by conducting a cash-based business, she says. "Vemo was created and sort of introduced to the marketplace as a cash-equivalent product," she said. "What's different here is there are actually records of these transactions."
Those records make it easier to require companies like PayPal to cooperate with changing laws. And unlike historical perceptions that a a lot of unreported cash income consists of lawn mowing or pocketed tips, digital third-party payments have become an enormous, she added. In last year's second quarter, Venmo's total payment volume (TPV) was $58 billion. "Venmo's not that little in the aggregate," she said.
Berman noted that while not reporting your business transactions seems simple, it could be be major trouble if you get audited. That could mean penalties, fees and interest on the unreported income. "The fundamental point people are forgetting in all of this craziness is that all we're saying is 'Venmo is going to require you to follow the law,'" she said.
The new requirement has seemed to cause a little confusion online. One Facebook post claimed any transaction on Venmo or PayPal of over $600 would be taxed (which is not true) according to a USA Today fact-check. This is perhaps inspired, it notes, by a US Treasury Department proposal (that has not been implemented) to track the total amount of withdrawls and deposits of bank accounts and financial accounts with over $600 in them, including by mobile apps, to generally limit how much money goes untaxed each year.
Republicans widely panned the idea, in a misleading manner, per FactCheck.org.
Third-party transactions are not the first to see a crackdown from Congress. In November, the infrastructure bill established new rules for cryptocurrency, according to MarketWatch.
Business owners who use payment app's business profiles (if available) don't necessarily have to worry about the new law until filing taxes for 2022 in 2023–when they will receive the relevant 1099-K form from the payment services.