IRS Requires Businesses to Report Income from Venmo and PayPal
Starting in 2024, the world of small business online transactions will see a significant change with new IRS reporting requirements for third-party payment platforms like Venmo and PayPal. While these apps have become ubiquitous for everyday transactions ranging from splitting dinner bills with friends to paying rent to roommates, the IRS is now targeting business income flowing through these platforms.
A Phased Approach to Reporting
Initially, the threshold for reporting income from third-party payment apps will be set at $5,000 for the 2024 tax year. This threshold will decrease to $2,500 in 2025 and will further decline to $600 in 2026. This phased approach gives businesses time to adjust their accounting practices and prepare for the new reporting requirements.
Navigating the New Rules
“As with most things with taxes, every year is kind of a new adventure,” says Mike Santo, a Senior Tax Manager at Wipfli. “The idea is that this is for goods and services being sold for profit. “
Santo notes that the rollout of these new rules might encounter initial hiccups, as each payment app likely has its own approach to implementing the changes. He advises businesses to anticipate potential variations in how payment apps manage the reporting process.
Avoiding Common Misconceptions
“If the ATM is down, people don’t have their wallet, whatever it is, all of a sudden Venmo use goes very high, very quickly,” says Alex Ward, owner of Ward’s Barbershop in Portland.
Ward’s recession of cash purchase habits is a phenomenon felt by many shopkeeper. Third-party payment apps offer convenience for customers and often provide businesses with a way to avoid credit card processing fees “If it’s a business transaction, the person hits that little button and then it takes out a transactional fee, but other than that, it’s been a fee-free system,” Ward explains.
It’s important for both businesses and individuals to understand that these new reporting rules only apply to business transactions, not personal reimbursements or expenses shared with friends.
“That’s not the intent of the rule,” Santo emphasizes. “If it was just for the reimbursement of expenses, you shouldn’t be getting taxed on that.”
The Importance of Correct Categorization
Tax experts strongly advise frequent users of Venmo and PayPal to be meticulous about categorizing their transactions. Incorrectly categorizing a personal payment as a business transaction could lead to unnecessary complications down the road.
