CSG Law Alert: Small Business Tax Alert: A New Tax Rule for Venmo Users Goes Into Effect for 2024 Tax Filings

As more and more people turn to mobile payment apps like Venmo, PayPal, or CashApp to handle their day-to-day financial transactions, the question of whether these apps are suitable for business purposes has become more pressing. While Venmo and other platforms can be a convenient way for small businesses to accept payments, it is important to understand the potential tax consequences of using these platforms for business transactions.

For now, the IRS has issued a temporary tax reprieve for anyone who received payments for their goods and services through these mobile payment apps. Specifically, for the 2022 tax year, Venmo has only issued Form 1099-K to business profile owners and individuals who received more than $20,000 in payments for the sale of goods and services and engaged in more than 200 transactions during a single calendar year.1 Beginning with the 2023 tax year, the threshold will be lowered from $20,000 per year to $600 per year for business transactions. Businesses who regularly use these mobile payment apps for business transactions may be subject to additional tax reporting requirements and tax liabilities.

Small business owners be aware that if you collected $600 or more for the sale of goods and services through a payment services company in the 2023 tax year without first providing your tax information on the required IRS Form,2 platforms like Venmo are required to withhold 24% of each payment and remit it to the IRS for backup withholding.3 All payments made to Venmo business profiles are automatically flagged as purchases, deemed to be payments for the sale of goods and services, and taxed accordingly. To avoid the withholding of their earnings, small business owners must complete Form 1099-K at the beginning of the tax season and send a copy to the payment processor.

Another potential tax liability that may result from the use of these mobile payment apps, is the underreporting of income. If a business fails to report all of its income earned through Venmo and similar platforms on its tax return, it could face penalties and interest on any taxes owed. To avoid such liabilities, small businesses should keep accurate records of all transactions and income earned through mobile payment apps. This includes maintaining detailed records of each transaction, including the date, amount, and purpose of the payment. Businesses should also keep copies of all receipts and invoices related to Venmo transactions to support their income as reported on their tax returns. As stated above, small businesses should also be proactive in completing the required forms at the beginning of the tax year. For individuals who continue to use Venmo for personal transactions, the tax implications remain relatively unchanged and straightforward. Because individual Venmo transactions are treated as cash payments, they are not subject to any specific reporting requirements.

To find out whether these new reporting requirements and tax liabilities will result in a higher tax bill for your small business, it is recommended that you consult with your accountant or attorney at CSG Law.

1 Vermont, Massachusetts, Virginia, and Maryland have a lower threshold, requiring only $600 in gross payment for the sale of goods or services in a single calendar year irrespective of the number of transactions.

2 The most common form is IRS Form W-9, but foreign businesses must provide one of the W-8 Forms.

3 The rate is the fourth lowest rate imposed on unmarried individuals under Section 1(c) of the Tax Code, which is presently 24%.

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