Are You Making These 8 Venmo Tax Mistakes?

Venmo is one of the most popular peer-to-peer payment platforms today, with over 75 million users in 2023. Because it’s such a common and convenient way for people to transfer money, half of self-employed people use peer-to-peer payment apps like Venmo or Cash App to run their businesses. 

Unfortunately, less than 23% understand the changes coming to next year’s digital payments tax reporting, making it easy to make tax mistakes when you use Venmo for your self-employed business. And due to a recent change that lowered reporting thresholds for peer-to-peer payment apps like Venmo, those mistakes will soon be increasingly visible to the Internal Revenue Service (IRS).

To save you the headache come tax time, here’s a refresher of the new 1099-K threshold and common Venmo tax mistakes self-employed people make.

Overview of the 1099-K Reporting Threshold

Form 1099-K is an informational return that payment networks like Venmo must send to you, the taxpayer, and the IRS each year that your activities on their platform meet a certain threshold.

Previously, Venmo had to send these forms out for taxpayers with 200 or more annual transactions totaling at least $20,000. Meeting one threshold or the other wasn’t enough. You had to hit 200 transactions and $20,000.

As a result, it was pretty rare for a Venmo user to trigger the 1099-K requirement. Even those who collected all their business income on the platform would have needed to average over 16 monthly transactions, which often isn’t true for many freelance business models.

However, the American Rescue Plan (ARP) of 2021 changed that. It reduced the monetary value requirement minimum to $600 in gross receipts and removed the transaction threshold altogether. Under that rule, it’s much easier to trigger the issuance of a 1099-K.

The change was originally going to take effect at the start of 2022, causing additional taxpayers to receive 1099-K forms in 2023. However, the IRS decided to help smooth the transition by delaying the change and giving everyone an extra year at the last minute, meaning if you exceed the $600 threshold in 2023, you’ll get a 1099-K in 2024.

That means self-employed people have less than a year to fix Venmo tax mistakes they’ve been getting away with. If you meet the $600 threshold and Venmo issues a 1099-K, the IRS will investigate any discrepancies between it and your tax return. No pressure, right?

In other words, you may be subject to an audit and face additional taxes, penalties, and interest. Now's the time to review your bookkeeping systems and prepare for the transition to the new 1099-K threshold.

8 Top Venmo Tax Mistakes

Let’s explore eight common Venmo tax mistakes self-employed people make when using a peer-to-peer payment app to complete business-related transactions.

1. Underreporting Income

It’s tempting to underreport your earnings when you think you can get away with it. After all, the less taxable income you include on your tax return, the lower your annual tax liability.

The old 1099-K thresholds made it easy to underreport income collected through Venmo, but the $600 limit is much less forgiving. If you’ve been using the platform to get paid under the table, it will be much harder to get away with it moving forward.

Because the person sending money on Venmo gets to decide whether transactions are tagged as payment for goods and services, you can’t count on being able to pass receipts off as personal activities either, even if you use a personal profile.

2. Failing to Gross Up Your Income

The platform automatically charges you a transaction fee when you collect business payments through Venmo. However, the cost won't be a distinct expense in your bank account. You'll take home a slightly lower amount than you charged.

Many taxpayers report that net amount as their gross income on their tax return, but that’s incorrect. Instead, you should claim the original amount you billed as income and record the transaction fee as a separate business expense.

You might think there's no difference one way or the other since you arrive at the same net income amount, but it impacts some significant calculations. For example, that includes your adjusted gross income (AGI), affecting your tax credit eligibility.

AGI is your gross income minus some adjustments, like your contributions to certain retirement accounts. However, those adjustments do not include your deductible business expenses, so failing to break out your Venmo transaction fees causes you to understate your AGI.

3. Not Setting Up Sales Tax

Transactions that involve the sale of most goods and some services are subject to sales tax. Unfortunately, the seller is responsible for managing their obligations, and Venmo doesn’t do much to help you.

It’s entirely up to you to determine which transactions are taxable based on what you’re selling and where you live, collect the right amounts, and send them to the relevant government agency – on time.

If you've gotten away with ignoring sales tax for Venmo earnings in the past, you won't be able to once the $600 threshold kicks in. If an audit also reveals that you've neglected your sales tax obligations, you'll have to pay back what you owe, plus penalties and interest.

4. Mixing Business and Personal Activity in One Account

One of the most common tax mistakes self-employed people make is to use one account for personal and business transactions. That creates many complications, whether you're talking about a bank account, credit card, or Venmo profile.

In the case of Venmo, this typically happens because you use the platform in your personal life and get comfortable with it. When you need to start collecting money from clients, it’s convenient to do so with a platform you already know.

Unfortunately, that often makes it difficult, sometimes impossible, to remember exactly which transactions go in each group at tax time. Months will have passed since you completed most of them, and you’ll often have to scramble to sort it all out.

Set up two separate accounts if you plan to use Venmo or another peer-to-peer payment app to send and receive payments with personal and business contacts.

5. Inadequately Documenting Transactions

Poor documentation for Venmo transactions is another mistake that will come back to bite you. At the very least, you need good enough records to file an accurate tax return, which requires tracking your income and expenses.

However, that’s a much lower standard than the one you’ll need to meet if you’re ever the subject of an audit. In that case, you’d need to provide supporting documents to verify that your Venmo transactions are what you say.

Most importantly, that means being able to show that:

• The expenses you claim are tax-deductible

• The receipts you exclude from your income aren’t taxable

To protect yourself from a potential audit, retain digital copies of documents like invoices sent and bills received for at least three years after the relevant tax year.

6. Failing to Double-Check Your 1099-K

If Venmo sends you a 1099-K, don’t just assume it’s accurate – cross-reference it with your records. Remember, the IRS is getting a copy too, and you don’t want them to suspect you’re misreporting your income.

If your records differ from the amount on your issued 1099-K or you think you received it by mistake, contact Venmo immediately. Keep your copy of the original self-employed tax form and all your communication with the company as supporting documentation.

Similarly, you shouldn’t assume you won’t receive a 1099-K just because you don’t think you meet the threshold for one. Around tax season, watch out for one hitting your mailbox. You want to avoid accidentally ignoring the form and getting in trouble with the IRS.

7. Using Venmo For Business in the First Place

Venmo is a convenient tool for sending and receiving money with friends, especially since so many people are on the platform. However, there are better choices for business transactions.

Not only does it typically project a less professional image than a well-crafted invoice would, but it’s also poorly suited to bookkeeping, especially if you try to use your personal profile.

By the way, Venmo’s terms and conditions forbid using a personal Venmo account for business transactions. If the company finds out you’re breaking the rules, it may reverse your payments or lock your account.

Peer-to-peer payment apps like Venmo are still less than ideal, even if you use a business account to collect payments. Most notably, it often makes paying you inconvenient since your customers must have an account on the same platform too.

8. Not Consulting a Tax Professional

It can be difficult to justify paying a Certified Public Accountant (CPA) for tax advice, especially when you're new to self-employment. After all, you're trying to keep expenses down, and your tax situation may seem uncomplicated.

That’s understandable, but it’s often a mistake. Hiring a CPA can more than pay for itself in time and tax savings in the long run. It also significantly minimizes your chances of making a catastrophic mistake.

If you're a freelancer, it's probably worth spending a little on a CPA to get your Venmo tax questions answered and set yourself up for success. A few hours of their time should be relatively inexpensive, and their services are tax-deductible.

Simplify Your Taxes With Found

Instead of collecting funds through a peer-to-peer payment app like Venmo, consider using Found’s all-in-one application. Designed to make every aspect of getting paid easier as a freelancer, you can use it to send unlimited, professional invoices to your clients and offer them a wide range of seamless payment options. That includes check deposits, credit cards, direct deposits, Venmo, and more.

Plus, Found’s built-in bookkeeping tools can automatically categorize your transactions and store copies of your supporting documents. Sign up for free and get started today!

The information on this website is not intended to provide, and should not be relied on, for tax advice.