The IRS reminds Americans earning over $600 on PayPal, Venmo, or Cash App transactions to report their earnings or else!

The passage of the American Rescue Plan in March 2021 means the threshold for 3rd party processors to report transactions to the IRS reduced from $20,000 to $600. This most certainly impacts heavy users of cash apps like PayPal, Venmo, Facebook Marketplace, and Cash App.

The New IRS Reporting Law

That is a significant reduction in the reporting threshold. If your transactions exceed $600, you will receive a 1099-K, which will be reported to the IRS. That doesn’t mean a single transaction surpasses $600, but all combined. That is a significant impact on heavy users of Venmo, Cash App, PayPal and others.  But what does that mean and what real impact does that have on Americans?

1. The IRS has always required reporting.

For starters, the IRS has always required a taxpayer to report all of their taxable income regardless of receiving a 1099 or not. We have clients all the time ask us:

“Well, if the client pays me in cash through Venmo, Cash App, or PayPal, do I have to report it?”

And our snarky response is:

“If you would like to stay out of jail, then yes, you should report it.” 

But what is the practical application of not reporting $200 of cash sales?  While technically still tax evasion, it is not a significant amount that triggers the IRS to audit or investigate.

2. So, why does the IRS focus on it now? Two words–Gig Economy.

There has been a huge increase in people earning extra side income in what is now called the “gig” economy. The gig economy was thrust into mainstream during Covid-19 when people were laid off due or looking for ways to increase their income. Others learned they could make money easier than they thought and pursued this avenue. One of the more popular ways money exchanges hands is through popular cash platforms such as Venmo, PayPal, and Cash App.

Regardless of the reason, the end resulted in significant transactions not reported properly on a taxpayer’s tax return and was flying under the radar of IRS scrutiny. And now, the unpaid taxes are of an amount that has caught the attention of the IRS to force a crackdown to enforce the already existing rule: you must declare all your taxable income.

3. Sending Family Money & Reimbursing Friends through Venmo, PayPal, and Cash App

“But what about when I send my daughter $500 monthly to help with her college expenses?  Does she have to report that as income now?  Or what about if my friends reimburse me for dinner and Broadway show tickets?  Do I have to declare that as income?”

The short answer is: No, that payment type is reimbursement and therefore not taxable income.  Taxable income would be derived from selling goods or services through these apps, not reimbursing a friend for dinner or giving your daughter an allowance.

“But what if Venmo does not know that and issues you a 1099-K anyway?  Then what?  Do I have to report it?”

And here is the longer and more complicated answer:

  • No, but you need to be able to prove/defend that the payments were not taxable income. You must show the IRS, via documentation (i.e., proof), that these payments were not for goods and services but merely reimbursements.
  • And to add to the complexity, you do not send in that documentation until the IRS asks you. The IRS will send you an audit letter asserting that you did not claim all of the income that you should have and send you a revised return with a bill and associated penalties plus interest.
  • When will they send this? Who knows, but they sometimes have up to 6 years to conduct an audit.

4. What should you do to protect yourself?

The IRS is hiring 87,000 agents to conduct audits on small business owners. 

And whether you are or not, if you get a 1099-K, the IRS will think you are a business and look to audit you.  You would still be on the IRS radar even if you received the 1099-K in error.

First thing–If you use VENMO or PayPal, call us and sign up for our new product offering: Tax Shield. This product covers our fees for representing you through an audit and includes suggestions to protect yourself now so that you are prepared to fight and win an audit with your CPA having your back. No one wants to fight the IRS alone – so DON’T!