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Make money via Venmo or PayPal? These 3 tax deductions may lower your tax bill, says CPA

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New IRS rules: When and how to report income from Venmo, PayPal, Cash App...
Key Points
  • Starting this year, third-party payment processers like Venmo, PayPal, Zelle and Cash App are required to report transactions received for goods or services totaling over $600 per year to the IRS.
  • If you're self employed or have a side hustle, there are a number of other common expenses you can use to reduce your tax bill.
  • "People that do side jobs have a lot of expenses that can reduce their tax burden," says Lisa Greene-Lewis, a certified public accountant and tax expert at TurboTax.

If you are self-employed or have a side hustle and accept payments through a third-party payment processor such as Venmo, PayPal, Zelle, or Cash App you may have heard about a new tax reporting requirement.

A provision in the American Rescue Plan that went into effect at the beginning of this year, directs third-party payment processers like Venmo to report transactions received for goods or services totaling over $600 per year to the IRS on a form called a 1099-K.

The change is a new reporting rule, not a new tax, meaning you won't be taxed on all of your Venmo transactions when you file your 2022 taxes, says Lisa Greene-Lewis, a certified public accountant and tax expert at TurboTax. Personal transfers won't be taxed.

Any income you earn through a peer-to-peer cash app is taxable, but you may be able to claim deductions on your tax return to reduce the amount of tax you owe, Green-Lewis explains. "People that do side jobs have a lot of expenses that can reduce their tax burden."

The process is straightforward, says Howard Samuels, a certified public accountant at Samuels & Associates in Florham Park, New Jersey. "Save the receipt for all of your work-related expenses and fill out a Schedule C form on your tax return," he says. "Then you would show the IRS, 'Hey, I collected $500 in profits, I paid $400 for supplies, therefore my profits will be $100." This way, he says, you only pay federal income tax on the $100 profit.

Aside from supplies, there are a number of other common expenses you can use to reduce your tax burden.

Here are three expenses you may be able to deduct or write-off when filing your taxes.

1. Car payments, mileage, and gas

"If you use your car for work, you can deduct car expenses to offset your income tax," Samuels says.

According to the IRS, "If you use your car only for business purposes, you may deduct its entire cost of ownership and operation (subject to limits). However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use."

Many people use their car for business and personal travel, so it's important to keep a record of your mileage, Samuels explains. "There are several apps that are out there that you can actually download and when you get in the car you hit the app to track your miles. Then you put in a memo for the business portion of a record," he says.

2. Home office expenses

"Another big deduction self-employed or side hustlers can take is the home office deduction," Samuels say.

However, this only applies to people who are self employed. "Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home," the IRS said in a September 2020 reminder on the home-office deduction.

According to the IRS, "If you use part of your home exclusively and regularly for conducting business, you may be able to deduct expenses such as mortgage interest, insurance, utilities, repairs, and depreciation for that area. You need to figure out the percentage of your home devoted to your business activities, utilities, repairs, and depreciation."

There are a number of requirements that need to be met in order to claim this deduction, so it can help to seek the assistance of a tax professional, Samuels says.

To claim the home-office deduction, taxpayers must exclusively and regularly use part of their home or property as their primary place of business. This could include a place where you meet customers, conduct your business, store inventory, or that you rent out.

Apartments, mobile homes, and boats may be eligible spaces, too according to the IRS.

It's also possible to take only part of the deduction. For example, if you left a 9-to-5 job, started your own business and use your home as your primary office space, you may be able to claim the deduction for part of the year, says certified public accountant Sheneya Wilson, the founder and CEO of Fola Financial.

3. Electronics and office supplies

Your computer, cell phone, internet, software, and even some technology products are possible tax deductions if you must use them to run your business, Green-Lewis says.

Aside from internet and cell service charges, these deductions can cover the purchase of office supplies, postage, computers, printers, and all the other ordinary and necessary equipment you need to run an office, whether you work from home or not.

Keep a clear record of your expenses

It's important to keep excellent records of your income, mileage, supplies, and any other deductions you can use to lower your tax burden, says Wilson.

"To make your life easier, create a personal Venmo or peer-to-peer cash app account, and a separate account for business," Wilson says.

If you haven't separated your personal and business accounts, you're going to be in for a lot of work, Wilson says. If every transaction is mixed together, "it's going to involve the taxpayers using their accountants or themselves, contacting the IRS to let them know what's going on, and then dissecting the income report to only reflect what the business transactions were," she says.

In addition to keeping your business income separate, "you'll also need to show proof to take any deductions, like home office deductions, mileage, etc.," Wilson says. "So save all of your receipts. Especially since the year just started, you still have time."

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