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

Zelle has what some people are calling a "tax loophole" because it isn't required to report transactions above $600 to the IRS. What's considered taxable income?

Kathryn Underwood - Author

Jan. 14 2022, Published 10:38 a.m. ET

Zelle logo
Source: Zelle Facebook

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.

Article continues below advertisement
Article continues below advertisement

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.

Zelle ad
Source: Zelle Twitter

Zelle is a banking transfer system.

Article continues below advertisement

What are the new tax reporting guidelines?

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.

Article continues below advertisement
Article continues below advertisement

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.

Article continues below advertisement

Is Zelle exempt from the $600 IRS rule?

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.

Article continues below advertisement

Do I have to pay taxes on Zelle transactions?

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.

Article continues below advertisement

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

Which Zelle transactions are taxable income?

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.

Article continues below advertisement
Article continues below advertisement

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.

Dinner party
Source: Getty

Splitting dinner? Those payments aren't taxable income since they're not business income.

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


Latest Taxes News and Updates

    Opt-out of personalized ads

    © Copyright 2024 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.