How To Avoid Venmo Tax Issues 2023
There’s been lingering confusion about tax reporting for peer-to-peer payment apps such as Venmo and PayPal.
Here is what you need to know:
- Personal P2P payments between friends and family still won’t be taxable, according to the IRS.
- On the contrary, if you are using a Venmo business account or a Paypal business account, you may be held accountable for the taxes due on these transactions. Continue reading for a guide!
Business Accounts:
Starting this tax year, such companies must use a new, lower threshold when issuing tax forms to individuals who make business transactions through those platforms. The tax-year 2023 threshold is just $600 for even a single transfer, down from more than 200 transactions worth an aggregate above $20,000.
As a result of the change, more taxpayers are likely to receive Form 1099-K, which reports third-party business payments to the IRS.
For any business, it’s important to keep detailed records of the costs related to the production of income. This includes any payments made through P2P platforms, as well as other business expenses — another issue P2P app users face.
For IRS purposes, using a P2P payment platform is similar to paying cash, which the IRS considers to be an unsubstantiated transaction. Business owners need to have additional documentation — such as invoices, receipts, or expense reports — to support the business purpose of payments made through a P2P platform.
For example, a business might pay its janitorial crew through Venmo for legitimate office cleaning expenses. But for IRS purposes, a Venmo time-stamped transaction alone does not supply sufficient information to substantiate a business expense.
- If you pay business expenses with Venmo, PayPal, or another P2P platform, make sure you have an invoice from your contractor or get a receipt from the vendor.
- This documentation should include the amount paid and a description of the business expense.
- This will ensure that you have the right backup information for your deductions if the IRS ever questions the legitimacy of your expense.
Keep in mind, as a business-owner, any payments made to you through a P2P app are still subject to IRS Form 1099 reporting rules and will need to be properly accounted for. From the IRS’s perspective, business income collected through a P2P app is no different from any other transaction that goes through a traditional bank account. Businesses are still required to report any payments received through Venmo and PayPal as taxable income when filing taxes.
Need Tax Help or Advice? Call ATS Advisors!