Venmo, Zelle®, and PayPal are familiar online payment platforms. They are peer-to-peer payment apps that allow you to transfer money. Some people use them to pay family and friends. Others use them to make business transactions.
What are these payment apps, and when you use them, can your transactions be taxed?
Increased Tax Reporting on Payment App Transactions
Taxation on business transacted through payment apps is nothing new. When you send money through certain peer-to-peer apps, specified amounts of business transactions are subject to taxation on the part of the recipient.However, the Internal Revenue Service (IRS) has recently changed the amounts for which they will require a 1099-K form. A 1099-K is the IRS form used to report payments for goods and services through third-party networks.
Before 2022, the minimum threshold for reporting business transactions in a tax year was $20,000 in gross payments and more than 200 transactions. If this number was met, the payment app was required to send a 1099-K form to the person accepting payment, and to the IRS.
That number has changed from the tax year 2022 forward. The new minimum threshold is $600 gross received for goods and services, and any number of transactions. If these numbers are met, then the IRS, and you, must receive a 1099-K from the payment app.
According to the IRS website, it is requiring lower limits on these transactions to improve “voluntary tax compliance.”
Lunch With Friends: Not Subject to Reporting
The requirement to send 1099-K forms for these minimum amounts does not affect personal payments.For instance, if your friend reimburses you for that lunch you paid for the other day, you will not have a taxation requirement. But make sure your friend doesn’t mark “services rendered” or anything else that may indicate a profit on your part.
PayPal: The Pioneer
PayPal is the pioneer for payment platforms, also known as pay apps. The parent company of 13-year-old Venmo, it has been around for about 23 years.PayPal links to your bank account or credit card, and can be used for business or personal purposes. The consumer can send money to anyone with a PayPal account. Many online stores offer PayPal as a payment option at the point of purchase. It’s also an easy and efficient way to send money to a friend or birthday money to your grandchild.
PayPal is a safe, private way to make monetary transactions. It offers buyer protection when purchasing from supported partners like eBay.
PayPal transactions can be free, depending on how soon users want to receive their payments. If you’re willing to wait for one to three business days, there will be no charge for the transaction. A one-day transfer is subject to a fee of 1 percent of the transaction, up to $10.
How the New Tax Rules Affect PayPal
PayPal is required to send 1099-K forms to the IRS. Because of this, they need users’ tax identification information. This is usually a Social Security number or employer identification number (EIN). PayPal will withhold funds until it receives this information.The 1099-K form is available for customers on PayPal’s platform.
Venmo: Safe, Not Necessarily Private
Venmo has become a verb among millennials. It grew in popularity during the pandemic. Generally, anyone in the United States who is 18 or older, with a cell phone that can send and receive texts, can use the service. Venmo is an easy choice for common transactions like reimbursing that friend for lunch or paying the babysitter.Although there are no fees to transfer money through Venmo using your debit card or bank account, it will take up to three days for the transaction to go through. There is the option of an instant transfer into your bank account from Venmo, but that comes with a fee. The charge is a 1.75 percent fee with a minimum of $.025 and a maximum of $25. If you use a credit card to fund your Venmo purchase, you will be subject to a 3 percent fee.
If you’re making a purchase, Venmo does offer purchase protection for buyers. But be careful when you hit “pay.” Venmo can’t help you if you accidentally send money to the wrong account.
There is also a privacy issue. Unless you make it a point to go into your settings and opt for “friends only” or “private,” Venmo, by default, makes all transactions public—so your friends will likely see who you’ve been paying, although they won’t see how much you’ve paid.
Venmo and the New Rules
Like PayPal, Venmo is required to supply a 1099-K form to the IRS and to its users. Venmo users who meet certain criteria (like receiving money for goods and services) will be asked to verify their identities with tax identification information. They may not be able to use the money in their Venmo accounts until they have supplied this information.Zelle®: No Fees, No Tax Reporting
Founded by banks, and with over 1,000 banks and credit unions in the United States offering the app, Zelle® is a peer-to-peer payment service that only moves money between bank accounts.To use Zelle®, you must be connected to a participating financial institution. In other words, when using Zelle®, either the sender or receiver, or both, must have access to Zelle® through their bank or credit union.
Usually, Zelle® transfers take only minutes between financial institutions, although it can take longer if Zelle® enrollment is incomplete. There are no fees with the service.
While the new IRS rules apply to most peer-to-peer payment apps, the Zelle® network is excluded from this requirement. This is because only third-party payment companies that handle the settlement of funds—transferring funds from a buyer to a seller in a transaction—are required to send out 1099-K forms.
In a Zelle® transaction, there is technically no third party besides the buyer and the seller. Instead, Zelle® is considered a bank transfer system that facilitates messaging between financial institutions and people making payments—not a third party. Zelle® payments take the place of checks.
The Epoch Times Copyright © 2022 The views and opinions expressed are only those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
