Leisl L. Langevin, CFP®, CDFA®
Senior Vice President & Financial Advisor
Peer-to-peer payment apps like PayPal, Venmo and Cash App make sending and receiving money easier than ever. With just a few taps on your smartphone, you can pay friends, split bills, and receive payments for goods and services. But did you know these types of transactions may be taxable by the IRS?
If you used PayPal, Venmo, Cash App or any other payment app in the last year, you’ll want to understand the potential tax consequences. Failure to report income and transactions made on these platforms can lead to penalties, interest and audits if discovered by the IRS.
Here are the key tax issues surrounding these payment apps to help you plan well to stay compliant and avoid unintended tax consequences.
Income Received on payment apps like PayPal, Venmo and Cash App is Taxable
The IRS considers any income you earn via PayPal, Venmo and Cash App or other payment processors to be taxable. This includes, but is not limited to:
- Payment for goods sold or services provided
- Tips or gratuities
- Rent or royalty payments
- Prizes or awards
- Reimbursements for expenses
- Peer-to-peer transactions over $600
You must report this income on your tax return, just as you would income from any other source. The same goes for business transactions – they are subject to tax like any other business activity.
Venmo Transactions Over $600 are Reported to the IRS
While personal Venmo transactions under $600 are not automatically reported to the IRS, business transactions and payments over $600 between two parties are. Venmo will provide a 1099-K form if you exceed $20,000 in gross payments and 200 transactions in a tax year.
It’s critical to keep your own records for smaller or personal Venmo payments to accurately report the income. The IRS may request them if you are audited.
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1099 Tax Forms Generated When Over Certain Thresholds
Venmo will issue a 1099-K form if your business transactions exceed $20,000 and 200 payments in a year.
PayPal, CashApp and other services do not automatically generate 1099 tax forms. It's up to you to keep meticulous records of every transaction - the date, amount, payer, and purpose. Without 1099 forms, this is the only way to accurately report the income. Failing to report it could lead to penalties and extra interest from the IRS.
Keep Meticulous Records of All Transactions
Since you aren’t provided tax documents for these platforms automatically, you must keep your own detailed records of every transaction on PayPal, Venmo and Cash App, etc. You should log the date, amount, source (payer), purpose and other notes so you can accurately report the income or deductions on your tax return.
Tax Deductions May Be Available
If you use these payment apps for business purposes, some transactions may be eligible for tax deductions. Things like service fees, business expenses, supplies and even home office use could potentially be deducted. Be sure to consult a tax professional about documentation requirements.
Failure to Report All Income Can Lead to Penalties
The bottom line is you must report all taxable income received through payment apps. Failure to do so can lead to IRS penalties, fees, interest charges and increased likelihood of an audit. To stay compliant, report this income on your tax return just as you would wages or other income.
The convenience of peer-to-peer payment apps comes with obligations. Make sure you understand what is considered taxable income and allowable expenses and keep detailed records to avoid issues with the IRS.
Consult a tax professional with any questions, and work with your financial advisor to see if there are ways to make your payment app income more tax-efficient – not to mention maximizing all of your income to benefit your major life goals.
Don’t have an advisor? Get in touch with our team at WHZ. Our team of advisors pool our collective knowledge and work together to build an investment strategy and overall strategic financial plan that’s tailored just for you and your goals, through our Plan Well, Invest Well, Live Well™ strategic process. Contact us for a complimentary consultation or call us at (860) 928-2341.
Presented by Senior Vice President, Financial Advisor Leisl L. Langevin, CFP® CDFA®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. 697 Pomfret Street, Pomfret Center, CT 06259 and 392-A Merrow Road, Tolland, CT 06084, 860.928.2341. http://www.whzwealth.com These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your financial advisor. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice.