Do You Use Venmo?

| December 3, 2022 | 0 Comments

Earlier this year, I took a trip with some friends. We did some sightseeing, went to some fantastic restaurants, and overall had a great time together. As we travelled, it was easier for one of us to pick up the bill for dinner or the hotel than to split it on four credit cards or try to wrangle that much cash, so the payment processing app Venmo became a really easy solution. We could use the app to tell each other that each of us owed $50 for dinner and so on, and then we could each process the payment through Venmo with a couple of quick taps and the money transferred. Other systems do this, too, but Venmo was the one we used.

So an article on CNBC recently caught my attention. It was reminding Venmo users that starting this year, Venmo would be required by law to issue a 1099 to users who processed more than $600 in transactions on the app. Say WHAT!?

Tucked into the American Rescue Plan Act of 2021 was a provision requiring third-party payment processing services like PayPal, Venmo and others (oddly not including Zelle) to issue a 1099 to those who receive more than $600 in payments for goods and services through the apps. In years past, the threshold for this was $20,000, but this was lowered to try to find unreported income.

According to an analysis by the IRS, under-reporting and underpayment of taxes amounts to approximately $144 billion per year, so having the systems that collect some of this income report it to the government makes sense.

Most people who use services like PayPal and Venmo shouldn’t be worried. For example, the transactions my friends and I made for things like dinner, hotels and baseball tickets are transfers between friends and family and shouldn’t be subject to this reporting, according to Venmo’s FAQ on the subject. On the other hand, if you have a business account on Venmo, you should expect to receive form 1099-K showing the amount that’s been reported to the IRS as income.

Jessica Dorsett, a CPA with Magnus Blue in San Marcos, had the following recommendations for people who use these payment processing apps for their business:

  1. Confirm your business EIN with the provider so that your 1099-K gets reported correctly
  2. Review your transactions to make sure they are properly categorized as business or personal
  3. If possible, keep your personal and business activity in separate accounts to make it easier to distinguish between them.

So what kind of transactions could generate a 1099? You might be surprised. For example, if you sold some used furniture on Venmo for more than $600, that could be reported to the IRS as income, even if you sold the furniture for a loss. Selling personal items (especially for less than you paid for them) isn’t usually taxable income, so what happens then? Or what if your transfers to friends are reported erroneously as income?

I posed this question to Dorsett, and she said it’s probably not worth the hassle to get the 1099 corrected with Venmo (or PayPal or whomever), although that’s the first suggestion in the IRS FAQ on the topic (Form 1099-K Frequently Asked Questions: Individuals | Internal Revenue Service ( Dorsett’s advice was to report the full amount of the 1099 on your tax return as business income, then make adjustments to that number (with explanations if needed) to get to the real business income number.

Should you continue to use Venmo to transfer money between friends? I plan to, although in this first year of trying to comply with the new rules, a lot of people will probably be getting 1099s for non-business transactions. If you do, make sure you discuss it with your tax advisor.  

This column is prepared by Rick Brooks, CFA®, CFP®. Brooks is director/investment management with Blankinship & Foster, LLC, a wealth advisory firm specializing in financial planning and investment management for people preparing for retirement. Brooks can be reached at (858) 755-5166, or by email at Brooks and his family live in Mission Hills.

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