Venmo, PayPal, and other so-called peer-to-peer payment platforms have been obliged to disclose revenue to the IRS since the beginning of the year if a user accumulates at least $600 in business transactions every year. Previously, someone had to declare if they received more than $20,000 from at least 200 commercial transactions per year.
The American Rescue Plan Act of 2021, a COVID-19 relief plan passed by Congress in March, modified this requirement. According to the IRS, affected platform users will get a 1099-K prior to tax season, which will detail the entire monetary value of reportable transactions. The new rule is designed specifically for business transactions. PayPal noted in a November statement regarding the change, “This does not include activities like paying your family or friends back using PayPal or Venmo for dinner, gifts, or joint trips.”
The websites have sought to distinguish between business and personal transactions: According to TechCrunch, Venmo began testing “Business Profiles” in July 2020, which included additional transparency and a transaction charge. PayPal has had a business option since at least 2013, while Cash App, another popular platform, has a Cash App For Business profile. This means that consumers can use the company profile to self-identify whether a transaction is commercial or not.
In actuality, adds Jennifer Berman, CEO of MZQ Consulting, “nothing is truly keeping people from utilising a personal account to conduct a business and dodge taxes.” It’s comparable to how people who run a cash-based firm don’t have to record their earnings, she says. “Vemo was created as a cash-equivalent product and sort of launched to the market,” she explained. “What makes this distinct is that these transactions are documented.”
These records make it easier for corporations like PayPal to be forced to comply with changing legislation. And, contrary to popular belief, a large portion of unreported cash revenue now consists of lawn mowing or pocketed gratuities, she noted that digital third-party payments have grown significantly. Venmo’s total payment volume (TPV) was $58 billion in the second quarter of last year. “Venmo isn’t that small in the grand scheme of things,” she explained.
While avoiding reporting your company activities may appear to be simple, Berman warns that if you are audited, you could face serious consequences. On the unreported income, this could result in penalties, fees, and interest. “In all of this insanity, people are forgetting that all we’re saying is that Venmo is going to require you to respect the law,” she said.
On the internet, the new requirement appears to have caused some misunderstanding. According to a USA Today fact-check, one Facebook post suggested that any Venmo or PayPal transaction over $600 will be taxed (which is not true). This is possibly inspired by a US Treasury Department proposal (that has not been implemented) to track the total amount of withdrawals and deposits of bank accounts and financial accounts with more than $600 in them, including through mobile apps, in order to limit how much money goes untaxed each year.
According to FactCheck.org, Republicans widely panned the proposal in a dishonest manner. Congress isn’t the first to take action against third-party transactions. According to MarketWatch, the infrastructure bill introduced new laws for cryptocurrency in November.
Business owners that use payment apps’ business profiles (if available) won’t have to worry about the new rule until 2023, when they’ll receive the required 1099-K form from the payment providers.
