For small-business owners or freelancers, a good portion of their financial transactions might be conducted via third-party platforms like PayPal, Venmo, or CashApp. When it comes to tax time, the IRS wants to get a clearer picture of people’s earnings through the said payment services (to ensure that taxpayers pay the full amount due). Does that mean you have to pay taxes on Venmo transactions?
For the 2022 tax year, new policy changes were expected to take effect in 2023, though the IRS decided to postpone them until next year (2024). The new rules, which were brought on by the American Rescue Plan of 2021, changed the reporting thresholds of third-party settlement organizations (TPSOs) from $20,000 and 200 transactions to $600 in aggregate payments.
Despite this, you may still be required to pay taxes on Venmo transactions this year. Here’s why.
Why did the IRS change the income threshold for third-party transactions?
In all likelihood, the policy change is a way for the IRS to keep closer tabs on small-business owners and anyone who earns income from multiple clients or sources throughout the year. It’s certainly feasible that even careful record-keepers could miss a few transactions here and there, especially smaller transactions that might be from a one-time sale, for example.
The IRS states, “Third party reporting has been shown to increase voluntary tax compliance and improve collections and assessments within IRS.” The IRS won't rely solely on freelancers and independent contractors to accurately report their income.
Previously, a 1099-K was only required at the $20,000 income threshold combined with at least 200 goods and services transactions within the year. Now, the new threshold (which will go into effect next year) is $600 in goods and services transactions.
When will you be required to pay taxes on Venmo transactions?
If you were paid for goods or services in 2022 via Venmo, you should receive a 1099-K form from the mobile payment service if you reached the $20,000/200 transaction threshold. For the 2023 tax filing season (2024), that limit drops to $600. A 1099-K form is used to help you report the income you earned from transactions processed through third-party organizations. And in most cases, it will result in you being taxed on your Venmo transactions.
The IRS will be able to cross-reference your 1099-K with the amounts provided by Venmo (or any similar payment service utilized) so it's best to wait until after you've received all your forms before you file your taxes.
Are Venmo payments received from family and friends taxed?
Since many consumers use services like Venmo for personal transactions, such as to pay a friend for their share of a dinner out, you might be wondering how that impacts the IRS reporting rule. The new change is only meant to apply to goods and services transactions, not for payments from friends and family.
A way to simplify things is to tag transactions appropriately when in PayPal or Venmo, which enables you to specify transactions as either peer-to-peer transactions (friends and family) or goods and services, which qualify as income.
PayPal also explained that sales of personal items that take a loss won't be reportable income. For example, selling a piece of furniture for less than you originally paid doesn't incur income reporting to the IRS since you didn’t make any money on the transaction.
What if you receive a 1099-K from Venmo in error?
If you receive a 1099-K from Venmo or another third-party network that reflects income meeting the lower dollar threshold ($600) in 2023, it was sent out of error. Fox Business shared that many companies have already inputted the upcoming changes into their system in preparation for the tax season. However, since the IRS decided to pause the $600 rule in December 2022 until next year, many taxpayers are receiving 1099-Ks in error.
While this can be frustrating, tax practitioner Ryan Ellis told Fox Business that "If you get it in error, you include it in income. Make a note that it's a 1099-K received in error, and then you deduct it as an adjustment."