As a financial expert specializing in the retail and consumer sector, I‘ve seen firsthand how peer-to-peer payment apps like Venmo have transformed the way people send and receive money. Gone are the days of needing cash or checks on hand – with just a few taps on your phone, you can now pay friends, family, and even businesses in seconds.
But this ease and popularity of payment apps has also brought up new questions and considerations when it comes to taxes. If you‘re using Venmo for anything beyond just splitting a dinner bill with friends, it‘s important to understand how your transactions may be reported to the IRS and what it means for your tax return.
In this comprehensive guide, I‘ll break down everything you need to know about Venmo and 1099 forms, including:
- What a 1099-K form is and when Venmo is required to send them
- How recent tax law changes have impacted Venmo‘s reporting thresholds
- The difference between personal and business transactions on Venmo
- How to track and report your Venmo income accurately
- Potential penalties for failing to report Venmo income
- Special considerations for small businesses, freelancers, and casual sellers using Venmo
Whether you‘re a Venmo pro or just starting to dip your toes into using the app for business purposes, by the end of this guide you‘ll have a clear understanding of your tax obligations and how to stay compliant.
The Basics of 1099-K Forms
Let‘s start with the fundamentals – what exactly is a 1099-K form?
A 1099-K is an IRS information return used to report payments received through third-party networks like payment apps and credit card processors. It‘s similar to the 1099-MISC or 1099-NEC forms that freelancers or contractors may be familiar with receiving, but specifically for payments processed through these third-party networks.
The key thing to understand is that 1099-Ks are issued for payments received for goods or services. Personal payments, like reimbursing a friend for dinner or receiving a gift, are generally not reportable on a 1099-K.
So when does Venmo issue a 1099-K? Prior to 2022, the threshold was fairly high – Venmo only sent 1099-Ks to users who received over $20,000 in payments for goods and services AND had more than 200 such transactions in a year.
However, this changed with the American Rescue Plan Act (ARPA) passed in March 2021. Starting with the 2022 tax year, third-party payment networks like Venmo are required to send a 1099-K to any user who receives $600 or more annually in payments for goods and services, regardless of the number of transactions.
This lower threshold means a lot more Venmo users will start receiving 1099-Ks. According to data from Venmo parent company PayPal, this change is estimated to impact 32 million accounts across PayPal, Venmo, and other subsidiaries.
Personal vs. Business Use of Venmo
Given these reporting thresholds, it‘s crucial to understand the distinction between personal and business payments on Venmo.
Personal payments are those made to friends and family, like splitting a bill, paying your share of rent, or sending a gift. These are not considered taxable income and are not subject to 1099-K reporting.
Business payments, on the other hand, are those received for goods or services. This could include:
- Selling items online and accepting payment through Venmo
- Getting paid for freelance work or side gigs
- Accepting Venmo payments for your small business
- Receiving tips through Venmo (if you have a business profile set up)
Venmo now offers users the option to create a business profile to more easily distinguish their business transactions. Payments to a personal profile are always treated as personal (ie. not reportable), while payments to a business profile are considered taxable by default.
According to a 2021 report from Venmo, the use of Venmo business profiles grew by 75% from the first to second quarter of 2021, indicating more people are using the app for business purposes. And with the rapid growth of the gig economy and online selling, this trend is likely to continue.
Tracking and Reporting Venmo Income
So what does all this mean for your taxes? In short, if you receive $600 or more in business payments through Venmo in 2022, you should expect to receive a 1099-K form summarizing those payments. Venmo will send this to you electronically in late January 2023, and will also file a copy with the IRS.
But even if you don‘t hit the $600 threshold or receive a 1099-K, that doesn‘t necessarily mean you‘re off the hook for reporting your Venmo income. The IRS requires all income to be reported, regardless of whether you receive a 1099.
In fact, the IRS has been increasingly focused on tracking income from the "shadow economy" – money made through gig work, online selling, and payment apps that may not be reported on 1099s. In 2007, the US Treasury Inspector General for Tax Administration estimated that the tax gap (the difference between taxes owed and taxes paid) from online sellers alone was $1 billion annually – and that was before the explosion of platforms like Venmo.
So what can you do to make sure you‘re accurately tracking and reporting your Venmo income? Here are some tips:
- Clearly separate business and personal use by setting up a Venmo business profile
- Mark business transactions as being for goods and services when prompted
- Keep detailed records of any invoices, contracts, or receipts related to your Venmo business payments
- Regularly download your Venmo transaction history and separate out reportable business income
- Consider using bookkeeping software that integrates with Venmo to automatically track and categorize payments
- Consult a tax professional to ensure you‘re correctly interpreting what counts as reportable income
Failing to report Venmo income can result in penalties, interest, and back taxes owed if the IRS discovers the discrepancy. The penalty for failing to report income is typically a percentage of the unreported amount, and intentionally not reporting income can even be considered tax fraud in severe cases.
Special Considerations for Businesses and Casual Sellers
If you‘re using Venmo more extensively for your business, there are some additional factors to keep in mind.
First, Venmo may not be the best solution for large volumes of business transactions. Venmo has a weekly rolling limit of $4,999.99 for payments sent to business profiles, after which point funds can be held. For larger businesses, a merchant processor like Stripe or a traditional business bank account may be more suitable.
Secondly, consistently receiving Venmo payments for goods or services may indicate that your activity qualifies as a business for tax purposes, rather than just a hobby. The IRS looks at factors like profit motive, regularity of sales, and time and effort invested. If your Venmo activity crosses over into business territory, you may need to file a Schedule C with your tax return and pay self-employment taxes.
Finally, it‘s important to understand that Venmo‘s tax reporting is separate from other business tax obligations you may have, like sales tax. Receiving a 1099-K from Venmo doesn‘t necessarily mean the IRS considers your sales to be taxable – it‘s just a report of the payments you received. You may still need to collect and remit sales tax separately depending on your state and what you‘re selling.
The Future of Venmo and Taxes
The recent changes to the 1099-K reporting threshold have some concerned about the impact on casual sellers and small businesses. Critics argue that the $600 threshold is too low and will create undue burden for those who only occasionally receive payments through apps like Venmo.
There have been some proposals to raise the threshold, including the Cut Red Tape for Online Sales Act introduced in the Senate in 2022, which would raise it to $5,000. However, the future of that legislation and the $600 threshold remains to be seen.
Regardless, it‘s clear that as more business activity moves to payment apps like Venmo, tax compliance will be an increasingly important consideration. The IRS has already shown it‘s paying more attention to income from these platforms, and that‘s unlikely to change.
The best thing Venmo users can do is stay informed, keep clear records, and consult with a tax professional if needed. By being proactive and understanding your reporting obligations, you can confidently use Venmo for your business or side hustle without worrying about tax surprises down the road.