IRS Tightens Reporting Rules for Income Earned Through Venmo, PayPal
Starting this tax season, small businesses and freelancers using popular payment platforms like Venmo and PayPal will face new reporting requirements from the IRS. Income thresholds for reporting transactions through these third-party payment networks will gradually decrease over the next few years, potentially impacting a large number of individuals who rely on these apps for business transactions.
$5,000 Threshold in 2024
Taxpayers who earn more than $5,000 through Venmo, PayPal, or similar platforms will be required to report that income on their 2024 tax returns. This threshold will drop to $2,500 in 2025 and, by 2026, any income exceeding $600 will need to be reported.
A Barber Shop’s Perspective
“If the ATM is down, people don’t have their wallet, whatever it is, all of a sudden Venmo use goes very high, very quickly,” says Alex Ward, owner of Ward’s Barbershop, a mostly cash-based business in Portland. For small businesses like his, third-party payment apps provide a convenient way to accommodate customers without incurring the additional expenses associated with credit card processing.
“If it’s a business transaction, the person hits that little button and then it takes out a transactional fee, but other than that, it’s been a fee-free system,” Ward explained.
Navigating the Transition: What You Need to Know
According to Mike Santo, Senior Tax Manager at Wipfli, users can expect each payment app to send them the required tax forms if their income exceeds the applicable threshold. While the IRS rollout is expected to be smooth, Santo advises that “this is where it can get tricky. Each of these third-party payment apps, they’ve probably all tackled this a little bit differently.”
Business Transactions Only
It’s important to remember that these new reporting rules apply strictly to business transactions. Personal transactions such as splitting a dinner bill with friends, splitting rent with a roommate, or reimbursing someone for expenses are not subject to these new requirements.
“That’s not the intent of the rule,” Santo reminds us. “If it was just for the reimbursement of expenses, you shouldn’t be getting taxed on that.”
Staying Ahead of Potential Issues
Tax experts strongly advise personal users who frequently use Venmo or PayPal to be diligent about categorizing their transactions correctly to avoid any potential complications. While the changes are designed to target business income, personal users could face unnecessary issues if their personal payments are misclassified.
