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Don't worry about personal Venmo transactions — the IRS won't tax them, says accountant: What you need to know

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Key Points
  • A provision in the American Rescue Plan that went into effect at the beginning of this year, directs third-party payment processers like Venmo, PayPal, Zelle and Cash App to report transactions received for goods or services totaling over $600 per year to the IRS.
  • "In this adjustment period, I highly encourage entrepreneurs to keep a proper record," says certified public accountant Sheneya Wilson, the founder and CEO of Fola Financial.

There's a lot of chatter online about a new tax reporting requirement that applies to users of third-party payment processers like Venmo, PayPal, Zelle, and Cash App.

Under the American Rescue Plan, a provision went into effect at the beginning of this year that directs third-party payment processers to report transactions received for goods or services totaling over $600 per year to the IRS.

"Many people are wondering what will happen if they pay a roommate rent using Venmo, or if they use one of these apps to send their kid's allowance, or pay a friend back for dinner," says Lisa Greene-Lewis, a certified public accountant and tax expert at TurboTax. You won't be taxed on those transactions, Greene-Lewis says.

Here's what you need to know about the new IRS cash app reporting requirements.

It's for tax year 2022, which you'll file in 2023

Before this legislation was passed, third-party payment platforms would only report transactions to the IRS if the user had more than 200 transactions and made more than $20,000 in payments over the course of a year.

Now that the reporting threshold is much lower, "people are concerned," Green-Lewis says. The first thing you need to know is that the law doesn't apply to "the taxes you're filing for this year for tax season 2021, it's for tax year 2022," which you'll file in 2023, she says.

Starting this year, third-party payment apps will track your transactions and issue you a 1099-K tax form if you earn $600 or more annually in income for goods or services. That form will be available to you next year and will also be automatically sent to the IRS.

This tax form might include taxable and nontaxable transactions, especially if the account is for both business and personal use. 

If you sell goods and services, 'become a good bookkeeper'

The reporting requirement should only impact you if you sell goods or services and you are paid using a cash app. So if you have a side hustle where you sell hand-made jewelry and your customers pay you via Venmo, "you need to become a good bookkeeper," says certified public accountant Sheneya Wilson, the founder and CEO of Fola Financial.

"Even though you already write who it is and what it's for, that needs to be more specified," Wilson says. "PayPal and Venmo have a family and friend option or a service for business option, but a lot of entrepreneurs are using family and friends for everything."

"In this adjustment period, I highly encourage entrepreneurs to keep a proper record. I tell my clients in their descriptions to leave details as if it was a journal entry. You want to write the date, who you're paying, what it was for, if there was an invoice attached to it that you're satisfying, write the invoice number," she says.

Be careful when using your account for both business and personal expenses

If your business and personal transactions are all on the same account, you may have to explain that to the IRS, but that's nothing new. "Last year I had a client who was audited because she didn't report all of the income she had received through PayPal," Wilson says. "However, some of those PayPal transactions was due to her family sending her money for rent."

To remedy the issues, "we contacted the IRS and alerted them that her PayPal had mixed transactions, and they allowed her to itemize her PayPal report. You really have to go through and highlight and denote what each transaction was really for."

Going forward, Wilson recommends using a separate business profile for your business transactions. "That doesn't mean you'll have to pay taxes on that income, you can offset income with expense," she says.

For example, you're allowed to write-off some of your rent or mortgage if you operate your side hustle out of your home, Green-Lewis says. "If you have to drive for your side business, you can write off mileage and gas, and supplies."

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