Zelle, a third-party payment app that enables convenient mobile transactions, will see some changes in 2022. Clearly, people are using the service. In 2020, Zelle reached a record $307 billion sent in 1.2 billion transactions. Is any of the money taxable by the IRS?
During the second half of 2021, some rumors circulated about the IRS changing the tax code regarding Zelle, Cash App, PayPal, Venmo, and other third-party payment processors. However, it’s important to know that for Zelle’s IRS rule changes in 2022, no new taxes are being levied. There will only be changes to the reporting requirements.
Zelle will have to report income over $600.
The new policy instituted by the IRS might have upset some people, but there isn't an increase in taxes on income from Zelle and similar apps. What’s changing is the requirement for reporting. Zelle and all other third-party payment companies must now report income over $600 to the IRS, explained CNet.
Prior to the change implemented through a section of the 2021 American Rescue Plan, third-party payment platforms only needed to report income above $20,000 with at least 200 commercial transactions per year to the IRS. Starting with the 2022 tax year, Zelle and Venmo will report income over $600 to the IRS and provide a 1099-K to the taxpayer.
Why isn't there a new tax?
People who are worried about additional taxation can relax because self-employed individuals were already required to report earnings. Whether they receive them through a third-party platform like Zelle or any other means, it’s up to the self-employed person or freelancer to maintain records and pay taxes on earned income.
The IRS wants to keep closer tabs on taxpayers and essentially, collect more in tax revenues. As the agency stated on its website, “Third party information reporting has been shown to increase voluntary tax compliance and improve collections and assessments within IRS.”
When will the Zelle tax reporting change take effect?
For Zelle and all other third-party payment processors, the changes don’t apply to 2021 taxes, which will be filed this spring. The reporting change will take effect for the 2022 taxable year. So, small-business owners will want to keep detailed records on their payment app income going forward.
Which transactions are taxable?
Since many people use platforms like Zelle and PayPal for both business and personal purposes, they might wonder which transactions on those platforms will be taxable. Fortunately, your personal transactions on these apps aren't subject to taxation—only business transactions apply.
One way to avoid confusion would be to have separate payment platforms or accounts for business and personal reasons. However, even if you conduct business in the same account as your personal one, you can keep careful records to categorize transactions.
Taxable transactions would include anything where you sold goods or services to another party. This might be income from a small business or a side hustle.
Non-taxable transactions on Zelle and other platforms include:
Payments for splitting rent or utilities with a roommate
Income from selling personal property at a loss (reselling old furniture for less than you paid)
Payments from friends for sharing the cost of dinner