What’s the Zelle Tax Loophole? New IRS Guidelines, Explained

With all the talk on social media about the new tax reporting guidelines for third-party payment apps, there’s some confusion about which companies are actually subject to the changes. Several companies like PayPal, Venmo, and Cash App will be required to send a Form 1099-K to account holders making more than $600 in transactions for the year.

However, you might not know whether your preferred payment app fits the new IRS guidelines. According to some sources on Quora, Zelle actually doesn’t qualify for the rule because it isn't classified as a “Payment Settlement Entity.” There might be a Zelle tax loophole to consider because it’s actually a bank transfer system.

A change in the tax code has stated that starting in the tax year 2022, payment apps must furnish a Form 1099-K to account users with over $600 in business transactions. Previously, the threshold was $20,000 with at least 200 transactions.

Third-party payment companies like PayPal, Venmo, and Cash App are subject to the new reporting guidelines. These aren’t actually new taxes being levied, but rather an added layer of verification by the IRS since the apps themselves must report income over $600 and send the recipient a 1099-K.

Some sources have included Zelle in their explanations of the IRS rule, but more clarification has arisen and Zelle states that it isn't subject to the IRS rule.

TikTok creator “dukelovestaxes” said in a video that the Zelle tax loophole exists because Zelle is a bank transfer system and not a “payment settlement entity" as the IRS defines it.

Zelle has confirmed online in its FAQ section that it doesn't have to report transactions to the IRS, even if they are over $600. Zelle won't issue any users a Form 1099-K, tax any transactions, or report them to the IRS.

While you might think of this as a Zelle tax loophole, all it really means is that Zelle is free from an obligation to report your income to the IRS or give you a tax form. If you're a small business owner or freelancer who accepts payment via Zelle, you’re still required to pay taxes on what you earn.

Zelle said, “If payments you receive on the Zelle Network are taxable, it is your responsibility to report them to the IRS.”

The change doesn't impact how much of a person’s income is taxable, it merely adds a reporting aspect to what third-party apps like PayPal must provide.

Any business transactions that result from your sale of goods or services are considered taxable income. This applies regardless of whether you receive the payment on PayPal, Venmo, Zelle, or another platform.

In contrast, personal transactions (a friend's reimbursement for dinner, shared rental payments, the sale of an old bicycle) aren’t taxable income.