What Should You Do with a 1099-K from Venmo?
Written By: Brian Ellenbecker, CFP®, EA, CPWA®, CIMA®, CLTC®
Electronic transfers of funds using apps has become a quick, convenient way to transfer money. Whether it’s Venmo, PayPal, Cash App, Zelle or one of the dozens of other options available, you have most likely sent or received money using one of these apps by now.
In the past, not much thought was typically given to any tax reporting unless you were using one of these services for business purposes. However, with the passing of the American Rescue Plan Act of 2021, the reporting of activity on these apps to the IRS changed dramatically. In the past, these third-party processers were only required to issue 1099-K tax forms – a form that reports transactions on their network to the IRS – if an individual had gross payments of over $20,000 and more than 200 transactions. The American Rescue Plan of 2021 lowered that threshold to $600 with no minimum transaction threshold, starting in 2022. The IRS just delayed the start of the reporting requirement to 2023.
With this new reporting requirement in place, what do you need to be aware of as we move into 2023?
1) The taxation of these payments is not changing. Even though more people will receive 1099-Ks reporting transactions on these payment networks, the taxation of these items does not change. Just because you receive a 1099-K doesn’t necessarily mean the income is taxable. If you are using one of the apps for business transactions, the income in excess of $600 is still reportable, and expenses are potentially deducible; same as they were prior to this change. There is also no change to personal transactions resulting in income (gains or losses from the sale of an item, payments for services, etc.). The purpose of this change was to simply help the IRS better monitor this type of activity and potentially crack down on the billions of taxable dollars that go unreported on these apps. Supposedly, the reporting change does not apply to personal transfers; however, it may be difficult for these apps to distinguish between personal transactions and business transactions. This could result in 1099-Ks being issued for your personal transactions, even though they are not taxable.
2) 1099-Ks could still be issued in 2022 under the new rules. Even though the timeline to implement the lower threshold for reporting transactions was delayed to 2023, some payment processors had already begun the process of sending the forms out before the IRS gave notice of the delay of the effective date. If you end up receiving one in 2022, work with your tax preparer to determine what, if anything, needs be done with the information reported.
3) 1099-K issued in error. If you receive a 1099-K for personal transactions that should not have been reported, you have one of two options:
– Contact the issuer, whose name can be found near the top left of the form. Explain why you believe corrections should be made. The issuer will then determine whether or not they will change it. This process can be difficult and the issuers are likely to be overwhelmed with these requests.
– Per Q&A 8 from the IRS’ FAQ About Form 1099-K, “If you cannot get the form corrected, the error should be reported on Form 1040, Schedule 1, Part I, Additional Income, Line 8z, Other Income, with an offsetting entry in Part II, Adjustments to Income, Line 24z, Other Adjustments.”
4) Create a personal and business account on your payment app. If you’re conducting business via one of the payment apps, consider creating separate accounts for your business and personal transactions. While most apps allow you to toggle back and forth between personal and business, if you choose “business” you may be charged fees. Venmo charges 1.9% plus $.10 per transaction. PayPal charges similar fees. If paying the fee is a deal breaker, having two separate accounts might help avoid the fee. Be sure to understand the difference in protection, refund policies, etc. between personal vs. business transactions before making that decision.
5) Use descriptive memos on your transactions. Unless you have emojis that describe the different types of business expenses you incur, the days of sending a few emojis in the note section is probably over. Type out a detailed description for each payment so when you’re compiling information next tax season, you can easily remember what each item was for. For example, “$150 to cleaners for AirBnb rental”.
6) Zelle isn’t subject to 1099–K reporting rules. If you’re using Zelle, they are not subject to this law. The reasoning is complex (you can Google it if you’re really curious) but using that app could be a way to avoid the risk of having personal transactions reported by mistake. Using Zelle does NOT change the taxation of anything, just what reporting you receive at the end of the year. It’s possible that Congress could extend the law to include Zelle or the IRS could investigate activity on their app if it’s suspected to result in noncompliance on your taxes.
If you have additional questions on 1099-Ks, reach out to your tax preparer or your Shakespeare Advisor. We are here to help talk through your personal situation and help provide peace of mind.