Third-party payment processors like PayPal, Zelle, Venmo, and Cash App have become essential tools for both gig economy workers and small business owners alike, providing convenient platforms for sending and receiving payments for products or services rendered. But beneath the simplicity these platforms offer, the surprisingly complicated question of cash app taxes and tax reporting standards can take you by surprise.
Answering Your Questions About Cash App Taxes and Tax Reporting Responsibilities
Recently, a client of ours found themselves in hot water after receiving an IRS notice assessing over $70,000 in overdue taxes due to an error on a 1099-K form issued by PayPal. Fortunately, our team of experienced tax attorneys were able to negotiate with the IRS to resolve the situation with no personal income tax due for our client.
To help prevent other small business owners and gig workers from finding themselves in similar sticky situations, this guide to cash app taxes and 1099-K forms will shed some light on your PayPal, Venmo, and Zelle tax reporting obligations and the importance of double-checking your tax forms from these payment processors.
Does Cash App count as income, and do you have to pay taxes on Cash App transactions?
The short answer is yes. Above a certain threshold, the money you receive from Cash App and other payment processing apps counts as income if used for business. And like any income, it is subjected to income taxes. However, this doesn’t generally apply to casual use of these platforms, like using Venmo to send and receive money to and from family for holiday gifts, splitting the tab at dinner, or paying your share of the rent.
Cash App, Zelle, and Venmo tax obligations only apply if you meet a certain threshold only businesses and self-employed individuals utilizing payment processing services are likely to meet.
Does Cash App report to the IRS?
If you receive enough money through these payment processors and surpass the reporting threshold, it will count as income that you will have to pay taxes on. If you meet the thresholds set by the IRS, payment processors have to report your gross payments to the agency by issuing documents called 1099-K forms.
What is a 1099-K form, and what do you do with it?
Form 1099-K is a tax document that reports payments received through third-party payment processors such as PayPal, Venmo, Cash App, and similar services. The payment processor is responsible for sending the document to account holders and reporting the total amount of payments received during the calendar year. The information provided on Form 1099-K can help determine your tax liability and ensure that you meet all tax obligations.
The IRS uses the information on the 1099-K forms provided by payment processors to verify income reported by taxpayers and ensure that all income—including income from Cash App and other payment processors—is accurately reported and taxed.
Do you have to report 1099-K income?
When you receive a 1099-K form from your payment processor, you must use it and your other financial records to help figure out and report your correct income on your tax return. If you receive a 1099-K and fail to report the income properly, the consequences can include additional tax, penalties, and interest.
When do cash apps report to the IRS?
The IRS depends on PayPal, Venmo, and Zelle tax reporting to prevent tax evasion and promote compliance with tax laws. Third-party payment processors have reporting thresholds for transactions that require them to issue 1099-K forms that report the income to the IRS.
When do you have to pay taxes on Cash App?
In general, you’re required to pay taxes on Cash App and other income you receive through third-party payment processors once you have made a significant amount of business payments. Generally, the reporting threshold is $600 of income, but the IRS is planning a threshold of $5,000 for tax year 2024, per their recent announcement.
Reporting thresholds for transactions can also vary depending on the type of transaction, the amount of transactions, and the total dollar amount of transactions. You may have to pay cash app taxes even if you don’t receive a 1099-K, so keep records of your income through these platforms for your own use and consult with tax professionals to understand your obligations.
Tips for Keeping on Top of Cash App Taxes
If your earned income through third-party payment processors exceeds the reporting threshold, you can expect to receive a 1099-K from the platforms you use. Now that you have a better understanding of what counts as income through these platforms and what your tax obligations are, let’s take a look at what you can do to make PayPal, Venmo, or Zelle tax reporting easier on yourself. Remember these tips to minimize your risk of future tax issues and help prove your case if you receive an IRS notice claiming you underreported your 1099-K income.
Keep Accurate Records
Small business owners and gig workers should keep accurate records of their PayPal, eBay, Zelle, Cash App, or Venmo transactions. This includes keeping track of the amount of money received or spent, the purpose of the transaction, the date, and any associated fees.
Use Accounting Software
Business owners can use accounting software such as Quickbooks to help them keep track of their transactions. Accounting software can make staying on top of cash app taxes much more manageable by generating reports, reconciling accounts, and categorizing transactions according to IRS rules.
Verify Your 1099-K is Accurate
In the case study we mentioned above, we were able to prove our client had no personal income tax due and that the apparent $70,000 they owed was due to a discrepancy in the 1099-K they received from PayPal.
Unfortunately, accidents do happen, and payment processors aren’t immune to making mistakes. Double-check that the information on your 1099-K is accurate, and ensure it matches your records. If there are any discrepancies, contact your payment processor quickly to resolve any issues and ensure an accurate report to the IRS.
Consult a Tax Professional
At the end of the day, tax law is complicated, especially surrounding self-employed and gig workers whose income exceeds PayPal, Venmo, or Zelle tax reporting thresholds. Consulting a tax professional can help you navigate the evolving complex tax rules surrounding third-party payment processors and ensure all transactions are properly reported.
Keep Up to Date with IRS Guidelines
The IRS regularly updates its guidelines for reporting financial transactions, including transactions facilitated through third-party payment processors and guidelines for those participating in the gig economy and working through apps like Doordash, Uber, and Instacart. Small business owners should also stay up-to-date with these updates to ensure they accurately report their transactions and pay their income taxes on revenue from Cash App, Zelle, PayPal, eBay, or Venmo.
What to Do if You Have a PayPal or Venmo Tax Problem
By following these tips, you can stay on the right track when tax season comes around. However, if you do end up making a simple mistake and the IRS sends you a notice for overdue or misreported income tax, don’t panic. Our team of experienced tax attorneys at Wiggam Law can help straighten out your IRS issue and get you back on track.
If you’re currently facing an issue related to Cash App taxes or Zelle tax reporting or have received a notice from the IRS claiming you have an outstanding tax liability, call us today at (404) 233-9800 or schedule a consultation online.
