An average American individual and business entity has to always keep up with modifications and changings in the tax treatments of different items in every tax year.
One recent development was made by the IRS that is related to the minimum threshold on the payments received from P2P payment networks, Shopify, and other eCommerce platforms.
P2P payment systems are third-party platforms facilitating consumers to transfer money to their friends and relatives and make business transactions.
The most popular P2P payments app of the era are Venmo, Cash App, PayPal, etc. These payment providers allow you to link your bank accounts to the wallet and make a payment anytime, anywhere.
Since PayPal and Venmo are the most widely used payment solutions, it is a big concern for many individual and business tax filers. They are concerned about how to handle the Form 1099-K they receive from the platforms for the tax year 2023.
In today’s article, we will discuss everything regarding the tax implications of using PayPal or Venmo for business transactions, the tax implications, treatment, and all other things you need to know as a tax filer. So let’s get into it.
- PayPal is an all-in-one payment service that allows faster, safer, and easy money transferring or accepting payments from anyone. Venmo is also a P2P payment system or a digital wallet allowing users to transfer money conveniently.
- Since 2013, PayPal has taken over Venmo and is part of PayPal Holdings Inc.
- Until you’re using PayPal or Venmo wallets for personal transfers like splitting a dinner bill, sending money to your siblings, friends, colleagues, etc., or purchasing stuff for yourself, there is no tax implication for such payments made by the users.
- The IRS announced in December of 2022 the delay in implementing the new thresholds for the tax year 2023. These thresholds are expected to be implemented for the payments made in the next calendar year and reported for the tax year 2024.
What Is PayPal?
PayPal is an all-in-one payment service that allows faster, safer, and easy money transferring or accepting payments from anyone. You don’t need to provide your private financial information to proceed with payments through PayPal.
PayPal accounts can be operated via the website or through the mobile app. Most of the famous eCommerce platforms, freelancing platforms, etc., also support receiving or sending payments via PayPal.
PayPal is an excellent solution as you don’t need to have a real bank account to receive or send payments with PayPal. If we look a little into the history of PayPal, it was founded by multiple founders in 1998 as Confinity. The later name of PayPal was X.com, which changed to PayPal Holdings Inc. in 2000.
What Is Venmo?
Venmo is also a P2P payment system or a digital wallet allowing users to conveniently transfer money. Venmo is a popular solution among students, individual users, and small businesses. It is one of the reasons why Venmo has a large customer base of over 60 million people and businesses. You need to connect your checking or savings account with your Venmo wallet and send or receive funds from anyone.
The main difference between Venmo and PayPal is that you can’t make payments with Venmo other than through the app. However, PayPal allows payments online as well as through the app. Venmo is also an American company like PayPal and was founded in 2009. Since 2013, PayPal has taken over Venmo and is part of PayPal Holdings Inc.
What Are Tax Implications of PayPal And Venmo Payments?
Technically, Venmo and PayPal are apps owned by the same company and also fall under the same category of P2P payments. Therefore, the tax implications for Venmo and PayPal payments will be the same as for the relevant category.
Here are the tax implications for your PayPal and Venmo payments:
Until you’re using PayPal or Venmo wallets for personal transfers like splitting a dinner bill, sending money to your siblings, friends, colleagues, etc., or purchasing stuff for yourself, there is no tax implication for such payments made by the users.
The users who use their PayPal and Venmo wallets for accepting business payments related to their small business, eCommerce website, or other business entities become subject to the tax implications of P2P payment platforms.
The IRS requires the P2P payments provider to send Form 1099-K to all the users using the platform to receive business payments above the minimum thresholds defined by the tax department.
Threshold for 2022
The minimum threshold for the tax year 2022 was defined by the IRS as follows:
A business or individual receiving business payments via third-party platforms will be subject to report the gross payments if:
- The amount of payments is above $20,000 for the tax year
- There are over 200 separate payments in that calendar year
Threshold For 2023
However, the tax implications for the tax year 2023 are as follows:
Any business or individual receiving business payments via third-party platforms will have to report the gross payments if such payments exceed $600 in a calendar year. However, the IRS removed the minimum number of transactions threshold, making it a more generic threshold.
It implies that all businesses receiving payments via PayPal or Venmo above $600 in a year will receive Form 1099-K from the payment platform.
Delay In Implementation Of New Thresholds
There has been a lot of noise lately regarding the new thresholds defined by the IRS. Everyone was preparing to follow the new thresholds for tax reporting in the current Year.
However, the IRS announced in December of 2022 the delay in implementing the new thresholds for the tax year 2023. These thresholds are expected to be implemented for the payments made in the next calendar year and reported for the tax year 2024.
It implies that the businesses or individuals doing business and receiving payments via PayPal and Venmo will receive Form 1099-K if the gross volume exceeds $20,000 with a minimum of 200 separate transactions in the current calendar year.
Having said that, it doesn’t mean that businesses or self-employed individuals are exempt from reporting their business income below $20,000. Regardless of the thresholds, such businesses and individuals are required to report all taxable income to the IRS in their relevant income tax returns.
What Is Form 1099-K and Who Files It?
If you’re unaware of what Form 1099-K is, its purpose, and who files it, here is what you need to know.
Forms 1099 comes under the category of Information Returns as per the IRS. There are various variations of Form 1099 targeted for different types of payments or income sources of individuals and business entities. The Form 1099-K is specifically for freelancers, independent contractors, unincorporated businesses, eCommerce sellers, etc.
When it comes to who files the Form 1099-K, here is who is supposed to file Form 1099-K in each case:
- The freelancing platforms & payment platforms from where the freelancers receive payments
- The Employers from whom independent contractors are being paid
- The payment platforms, selling platforms, eCommerce stores, etc., from where businesses and eCommerce sellers receive sale proceeds
What Is Treatment For Venmo and PayPal Payments Subject To Personal Transfers?
If you are using Venmo and PayPal for personal transfers, there is no tax treatment or implication for such payment. It would be a mistake if you received a Form 1099-K from Venmo or PayPal when you did not receive business payments.
So what do you need to do?
IRS cannot do anything about the payment platform issuing you a Form 1099-K for personal payments. All you need to do is contact the payer whose name appears on the upper left corner of Form 1099-K and ask for the correct Form.
However, if you’re running short on time, you can easily adjust the problem in your tax return. All you have to do is zero the payments. It implies that if you received a total of $900 via PayPal or Venmo, you have to report the amount under the head of proceeds in Schedule D. To zero it out, report the same amount under the head of costs, and the net profit will be zero.
Doing so means you won’t have to delay your income tax returns to receive the corrected Form 1099-K from the payment platform.
How to get Form 1099 from PayPal?
If you’re using PayPal for business payments, and the minimum threshold is met, you will receive the Form 1099-K automatically. You can view and download your Form 1099 from PayPal by following these directions on the web browser:
PayPal account log in > Settings > Statements and Taxes > Tax Documents > Select Year > Download
Activity > Tax Documents > Tax Year > 1099-K > Download.
What is the limit for Venmo?
The transfer limit for Venmo is $5000 per transfer. You can’t transfer more than $5000 in a single transaction and will need to make multiple transactions for payments above $5000.
Why didn’t I get a 1099-K from PayPal?
If you were expecting to receive your Form 1099-K from PayPal for the current tax year, as your business transactions were above $600, don’t worry. You didn’t receive the Form because the IRS has delayed the implementation of new thresholds for current-year tax reporting.