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Venmo, PayPal And The IRS: Here’s What You Need To Know

By News Creatives Authors , in Small Business , at January 1, 1970

Angie Noll is the Owner of Reconciled Solutions. She is a Certified Profit First Advisor and has an MBA from Loyola (Chicago).

Beware, business owners and side-giggers: You are subject to taxes on your earnings when you collect payments from peer-to-peer apps like Venmo, PayPal and CashApp. To be clear, this is not a change in tax law since these earnings were already taxable; it is just a reporting change, where these providers must now send users tax forms for payments over $600, and the IRS can utilize mobile money apps during the audit process.

In my business, I coach many aspiring entrepreneurs on whether or not they have a solid business plan and feel confident in quitting their day job and turning their side hustle into a full-fledged business. These new entrepreneurs often collect payment through mobile money apps from their customers when they are in the feasibility stage of starting their businesses.

I also come across many business-to-consumer entrepreneurs like wedding DJs, family photographers, movers and hair stylists who prefer to have clients pay them for services via mobile money apps. It is a very widely accepted form of payment in their industries.

These are examples of areas in which if the provider accepts more than $600 in payment in a year via apps like Venmo, PayPal or CashApp, and they will be required to file a 1099-K to report their earnings. Keep in mind that the IRS doesn’t care if you go out to dinner with a friend and pay for your portion with an app or if you pay for your share of rent via a cash app. These are examples of exchanges of paying money between friends and family and do not apply to the requirements established in the American Rescue Plan Act of 2021.

If you find yourself collecting regular payments from clients via third-party apps, here are some things you should know to set yourself up for success.

1. Set up a separate business account with the money app of your choice. When using the likes of Venmo, PayPal, CashApp or Zelle, you can set up a separate bank account for personal use and a separate bank account for business use. (Note that if you are using the Zelle app, your transactions are not automatically reported to the IRS, whereas Venmo, PayPal and CashApp are required to report transactions to the IRS. It is your responsibility to report taxable business transactions collected via Zelle to the IRS.)

2. Don’t try to hide your transactions. I’ve seen many try to push business income through peer-to-peer apps by leaving the settings on their account subscribed to “friends and family” rather than changing the settings to “goods and services.” This is an effort to avoid recording revenue when revenue is incurred. I don’t recommend this strategy; it is illegal, and failing to record business income can definitely lead to serious consequences. Furthermore, it makes it difficult to see whether it is a sustainable lifestyle choice for yourself if you do not honor both the income and the cost side of doing business.

3. Separate personal and business bank accounts. If your business is starting to take off and you are actually incurring expenses in the process of doing business, it would behoove you to separate your banking into a business and personal account. By doing so, you are creating an opportunity to deduct expenses from your income created by your products and services. This is a legit business write-off, so take advantage! If you need to buy a new lens or camera for your photography business, for example, then you can write off that expense, and you should take advantage of this opportunity to lower your net income.

Final Thoughts

Times are changing, and peer-to-peer apps for money exchange certainly make life easier when it comes to paying back a friend for money owed to them. Thank goodness for advances in technology. I don’t think kids are even taught how to write a paper check in school anymore. That said, it comes as no surprise that the IRS has identified a path to make sure we are paying taxes on another facet of how we earn money. While not everything is clear-cut as to how the IRS will fully document and enforce the reporting change, rest assured that reporting earnings on money apps is definitely here to stay, and we need to add the cost of staying compliant to our calculations when measuring the success of a venture.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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