What Are the IRS Rules for Payment Apps Like Paypal, Venmo, Zelle, or Cash App

There?s a lot of misinformation about the new IRS rules for payment apps that took effect on January 1, 2022, and many users fear that their transactions on apps like PayPal, Zelle, Cash App, or Venmo will be taxed.

The new reporting requirement applies only to sellers of goods and services, not to personal payments.

It applies to your 2022 taxes, which you?ll file in 2023.

"There?s a bit of confusion about this rule," says Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center at the Urban Institute.

The idea that any payment received over $600 will automatically be taxed as income is false, he explains.

"These [1099-K forms] are just informational reports. They don?t themselves determine tax liability."

The reporting requirement is an effort to reduce the country?s annual tax gap?the difference between taxes owed and taxes paid?which the IRS estimates at about $166 billion per year, not including the tax gap from large corporations.

This is not a new tax and does not suggest the imposition of a new tax.

Here?s what you need to know and how you should prepare for tax season in light of these new rules.

Who Needs to Report Income from Apps Like PayPal, Venmo, Zelle ou Cash App?

This new reporting requirement only applies if someone is buying or selling goods and services using a peer-to-peer payment platform, says certified public accountant Sheneya Wilson, founder and CEO of Fola Financial.

If you receive money for dog walking, for example, and are being paid through Venmo, that is taxable income and will need to be reported to the IRS.

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But say you sell a couch to someone online for 1,200.As long as you can prove with a receipt that you originally paid more than 1,200.

As long as you can prove with a receipt that you originally paid more than 1,200 for that couch, it is not considered taxable income, says Wilson.

If you go out to dinner with a friend and send them your half of the bill through a money transfer app, that transaction is also not taxable, she says.

However, if you?re earning money through one of these apps, consult a tax professional.

And even if you have the help of a professional accountant, you?ll want to follow these three steps on your own, says Wilson.

1. Print a transaction report: Many peer-to-peer payment platforms allow users to print transaction reports. Download your transactions for the year.
2. Differentiate your transactions: After downloading your transactions, determine which were business transactions and which were personal. "I have our clients print their reports so we can format an Excel spreadsheet, and they can denote: 'Here?s income, here?s what came from my aunt, here?s what came from my sister,'" says Wilson.
3. Gather supporting documentation: Gather your invoices and receipts as supporting documentation to show which transactions were income and which were not.

If you received money as a gift, you may need to explain the relationship between you and the person who gave you the gift.

It?s important to note that simply showing the IRS a bank or credit card statement does not qualify as a receipt.

Wilson suggests creating a designated email account to receive electronic receipts and keep your transactions organized.

Business Expenses Can Help Offset Your Tax Burden

Receiving a 1099-K and reporting income from payments received through a peer-to-peer payment system is not new: the tax reporting requirement began in 2012, although the threshold was higher.

A seller would only need to report income to the IRS if they had received $20,000 in payments per year and there were at least 200 transactions in their account.

However, in January, "the threshold is being drastically reduced, from 20,000 to 20,000 to 600, with no minimum number of transactions," says Rosenthal.

Remember, the IRS only cares about your profit. Any costs associated with running your business can be deducted and help offset your tax burden.