Venmo, PayPal and Zelle®: new tax reporting rules

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Venmo, Zelle®, and PayPal are well-known online payment platforms. These 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 carry out commercial 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 transactions made through payment apps is nothing new. When you send money through certain peer-to-peer applications, specified amounts of business transactions are subject to tax on the part of the recipient.

However, the Internal Revenue Service (IRS) recently changed the amounts for which they will require a Form 1099-K. A 1099-K is the IRS form used to report payments for goods and services through third-party networks.

Prior to 2022, the minimum threshold for reporting business transactions in a tax year was $20,000 in gross payments and more than 200 operations. If this number was reached, the payment application had to send a Form 1099-K to the person accepting the payment and to the IRS.

This number has changed starting with the 2022 tax year. The new minimum threshold is $600 gross received for goods and services, and any number of transactions. If these numbers are met, the IRS and you should receive a 1099-K payment application.

According to the IRS website, it requires lower limits for these transactions to improve “voluntary tax compliance.”

Lunch with friends: not subject to declaration

The requirement to send Forms 1099-K for these minimum amounts does not affect personal payments.

For example, if your friend reimburses you for the lunch you paid for the other day, you will have no tax liability. But make sure your friend doesn’t mark “services rendered” or anything else that might indicate profit on your part.

PayPal: the pioneer

PayPal is the pioneer of payment platforms, also known as paid apps. Venmo’s 13-year-old parent company has been around for about 23 years.

PayPal is linked 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 point-of-sale payment option. It’s also a simple and effective way to send money to a friend or birthday money to your grandchild.

PayPal is a safe and private way to transact money. It provides 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 are willing to wait one to three business days, there will be no charge for the transaction. A one-day transfer is subject to a fee of 1% of the transaction, up to $10.

How the new tax rules affect PayPal

PayPal is required to send 1099-K forms to the IRS. For this reason, they require users’ tax credentials. This is usually a social security number or an employer identification number (EIN). PayPal will hold the funds until it receives this information.

Form 1099-K is available to customers on the PayPal platform.

Venmo: Safe, not necessarily private

Venmo has become a verb among millennials. It has grown in popularity during the pandemic. Generally, anyone in the United States who is 18 years of age or older and has a cell phone capable of sending and receiving text messages can use the service. Venmo is an easy choice for everyday transactions like paying off that friend for lunch or paying the babysitter.

While 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 complete. There is the option of an instant transfer to your bank account from Venmo, but this incurs a fee. The fee is 1.75% with a minimum of $0.025 and a maximum of $25. If you use a credit card to fund your Venmo purchase, you will be subject to a 3% fee.

If you make a purchase, Venmo offers purchase protection for buyers. But be careful when you click “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 to your settings and opt for “friends only” or “private”, Venmo, by default, makes all transactions public, so your friends will likely see who you have. paid, even if they won. I don’t see how much you paid.

Venmo and the new rules

Like PayPal, Venmo is required to provide a 1099-K form to the IRS and its users. Venmo users who meet certain criteria (like receiving money for goods and services) will be asked to verify their identity with tax credentials. They may not be able to use money from their Venmo accounts until they provide this information.

Zelle®: No fees, no tax declaration

Founded by banks and with more than 1,000 banks and credit unions in the United States offering the app, Zelle® is a peer-to-peer payment service that only transfers money between bank accounts.

To use Zelle®, you must be connected to a participating financial institution. In other words, when using Zelle®sender or receiver, or both, must have access to Zelle® through their bank or credit union.

Usually Zelle® transfers only take a few minutes between financial institutions, although it may take longer if Zelle® registration 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 funds settlement (the transfer of funds from a buyer to a seller as part of a transaction) are required to submit Forms 1099-K.

In a Zelle® transaction, there are technically no third parties apart from the buyer and the seller. Instead, Zelle® is considered a wire transfer system that facilitates messaging between financial institutions and people making payments, not a third party. Zelle® payments replace checks.

The Epoch Times Copyright © 2022 The views and opinions expressed are solely those of the authors. They are intended for general informational purposes only and should not be construed or construed as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or other personal finance advice. Epoch Times assumes no responsibility for the accuracy or timeliness of the information provided.

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