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The Venmo Tax: What You Should Know About the New 1099-K Form In Your Mailbox Next Year

Accounting and TaxesDecember 21, 2022

Every year starts the same: a barrage of tax documents stacked in your mailbox or inbox, a reminder of last year’s ups and downs. Over the years, you’ve gotten used to the steady flow of 1099s and w-2s, but coming soon—a new challenger approaches.

The Internal Revenue Service (IRS) announced that it would start including payments for goods and services made on peer-to-peer apps like Venmo, Cash App, and PayPal in the 1099-K filing requirements starting with the 2023 tax year:

  • The filing minimum will fall from $20,000 to $600

  • Transaction requirements will decrease from 200+ transactions to no minimum.

Americans could see this new tax form for using these popular apps, something which has made headlines in recent days. Just about everybody uses these apps nowadays, whether to pay their friends back for lunch, to get paid back for buying a round, or even doing work. But not to worry—just receiving a Form 1099-K doesn’t necessarily mean you owe Venmo taxes. You only owe taxes if you earned money for services you performed as a freelancer, contractor, or businessperson—and you’d be expected to pay taxes on this income anyway.

In short, while the new tax form might feel overwhelming to freelancers and gig workers at first, understanding what exactly it is and why it’s beneficial might be a welcome surprise—especially with tax season on the horizon. 

What to know about Form 1099-K

A 1099-K form is a tax form delivered to merchants with a summary of certain digital payments made throughout the year. It’s considered an “information return,” meaning that it informs businesses and the Internal Revenue Service (IRS) of the transactions it makes during the year.

Sent to merchants at the end of the year, Form 1099-K includes a summary of all the credit, debit, and digital payments received through a point-of-sale provider like Stripe, Square, or PayPal. 

Americans are taxed only on income—money made from work, investments, or other sources. 

So what exactly is the “Venmo tax”? For those taking business payments through a peer-to-peer app like Cash App, Venmo, or PayPal, those payments constitute income—and that means you’ll owe the tax man a cut of the proceeds. 

Some one-person shops might see the new form as an inconvenience, but it stands to help freelancers with business profiles on peer-to-peer apps by saving them time in reporting their income. That said, freelancers, solopreneurs, merchants, gig workers, and contract workers will need to scrutinize their peer-to-peer app transactions to ensure that all of their business income is reported.

Benefits of 1099-K forms 

Reporting this gross amount can be beneficial for merchants, especially those who transact on plastic—mostly credit and debit cards—because it summarizes the total value of the payments made over the tax year. 

That means that come tax time, business owners, contractors, freelancers, and other 1099-K recipients can simply plug the contents of their 1099-K into their business income on their tax return and write down other expenses not considered in the gross amount against it, such as refunds, chargebacks, and other business expenses.

You should consult a tax professional if you have questions about how to report your 1099-K.

Will I be taxed on my 1099-K form? 

Despite the pervasive anxiety about 1099-K forms, most platforms have said that only people who accept payments for goods and services should expect to receive the 1099-K

That means that people who have set up a business profile on PayPal, Venmo, or Cash App should expect to receive a 1099-K. In addition, people who earned more than $600 for goods or services on these apps will also receive a 1099-K.

However, peer-to-peer transactions—those between friends and family, often with no fees—will likely not trigger a 1099-K. But if you received income via these apps, you need to report it.

Self-employment and the Venmo tax

Until this year, Form 1099-Ks were a mainstay with merchants—that is, people selling many services or goods either in physical locations or online. 

In 2021, the IRS announced that it would start including payments for goods and services made on peer-to-peer apps like Venmo, Cash App, and PayPal in the 1099-K filing requirements. The announcement makes sense, seeing as though these peer-to-peer apps are becoming popular checkout options on online merchants.

That means that, in the near term, self-employed individuals should expect a 1099-K in their mailbox or email. They might even expect a few, especially if they use multiple payment platforms.

After adjusting to the learning curve, there’s very little to fret about as a self-employed individual. The 1099-K changes made by the IRS boil down to just another filing come tax time, which could make reporting income from peer-to-peer apps easier for people with good documentation.

That said, self-employed individuals who were not expecting to pay taxes on income from peer-to-peer apps may not have set aside the proper taxes throughout the year, which may make for an unpleasant tax season. And that should be a wake-up call for scores of freelancers who aren’t paying self-employment taxes or staying on top of their business income.

Avoiding tax-time surprises

For self-employed individuals who were not expecting to be taxed on income earned on peer-to-peer apps, the receipt of 1099-K’s for the 2021 tax year might not be welcome news. But the good news is that there are ways to set your business up moving forward to avoid the same unpleasant surprises in the future.

  1. Separate business from personal expenses: There’s a surprisingly easy way to make life easier on peer-to-peer apps in the future: make sure your personal and business finances are separate. If you haven’t already, solopreneurs and freelancers who accept payments on the apps should create separate business accounts so you can isolate business finances without the confusion of personal transactions getting in the way.

  2. Keep track of and categorize all business expenses: On the whole, one-person shops and sole proprietors should get into the habit of tracking expenses related to their business. Keeping track of these expenses will help keep your tax bill as low as possible since you can write off business expenses. 

  3. Identify all relevant deductions: Write-offs are a self-employed individual’s best friend come tax time and make the headache of expense management well worth it. There are many categories of tax deductions that self-employed individuals can utilize, so make sure you are categorizing expenses as you go and keeping track of which expenses can be written off.

  4. Save as you go: Since self-employed individuals don’t have a traditional employer to manage their tax savings for them, one of the best things to do to avoid tax bill surprises is to put aside a share of every payment received into a separate tax savings account. That way, the money is out of sight, out of mind, and properly accounted for when it comes to tax time. If you’re not sure how much you should withhold, check out the IRS’s outline of tax rates by income.

  5. Collect payment via invoice: Invoicing is an easy way to ensure you get paid for your work, enhance your professional appearance and have a physical record of what you did to earn that money. That can save you hours come tax season. 

Take the guesswork out of taxes

Tax time is no one’s favorite season (with the exception of accountants?), and for self-employed people, it can be even more challenging. Fortunately, there are a lot of great and inexpensive tools out there to help mitigate the pain, offering free or low-cost business banking and expense tracking complete with invoice tools and tax write-off tracking so you can manage everything in one place. Learn more about how Found can help alleviate tax season headaches for small businesses and the self-employed.

This material has been prepared for informational purposes only.

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