According to Capital One Shopping, by early 2024, more than 87% of Americans have already used online payment apps to buy and sell. The growing popularity of fintech tools can be attributed to two key factors. On the user side, these tools offer the convenience of making transactions anytime, anywhere. Meanwhile, from a business perspective, fintech tools enable companies to offer customized products or services and reach customers whether they’re at home, at work or on vacation. In particular, online payment systems like Venmo empower small and medium-sized businesses (SMBs) by bridging the gap between customers and businesses, providing convenient tools for processing transactions and interacting with their customers.
By avoiding traditional banks, you can avoid hidden fees and inactivity charges, which is convenient. But it doesn’t mean you can avoid reporting your income to the IRS. As digital transactions become more commonplace, it’s important to understand your tax obligations. Venmo users, for example, should be aware that a Form 1099-K will be issued if they meet the criteria for receiving electronic payments. It’s important to note that the U.S. requires the reporting of small amounts of income. Common rationalizations like “Venmo doesn’t really pay me much” or “it’s too complicated” are not valid because every dollar counts and reporting is easier than it seems. To make sure you’re on the right side of the law, let’s break down how to report Venmo income, with guidance from tax expert Irina Tsymbaliuk.
Why is Form 1099-K important?
Form 1099-K is a tax reporting document used in electronic payments and transactions. This one matters because:
- Form 1099-K is used to report income received through payment systems like Venmo. For example, you receive payments electronically-from customers, clients, or other sources. A payment processor will issue this Form to you if you meet certain thresholds (valid until the end of the transition year 2022):
- You had at least 200 transactions during the year.
- The total gross payment amount exceeds $20,000.
- The American Rescue Plan Act of 2021 enacted new thresholds that take effect at the beginning of 2023: Each TPSO is required to report payments on account of third-party network transactions that exceed a minimum threshold of $600 in aggregate payments, regardless of the number of transactions — Internal Revenue Service.
- When you receive a Form 1099-K, you know that the IRS knows about your income — this provides transparency and helps prevent underreporting of income.
- If you received a Form 1099-K, it’s important to report all sources of income when you file your tax return. This includes amounts that may seem insignificant. They should be reported accurately, down to the last penny.
Remember, Form 1099-K is not just a convenience — it is a legal requirement that helps you comply with tax requirements. Be aware that inaccuracies or errors on Form 1099-K can result in penalties.
Reporting Venmo Income on Form 1099-K: A Comprehensive Step-by-Step Guide
By default, payment systems provide tax documents electronically. You can fill out Form 1099-K either in the payment system application, in our case Venmo, or on your financial service provider’s website.
Penalty avoidance, tax transparency, tax compliance, and error avoidance are all minimal benefits of filling out a 1099-K. Anything tax-related can seem complicated, but to avoid surprises when filling out your 1099-K, use the step-by-step guide below. Here’s how to get it right:
- Make sure you have all the information you need:
- Taxpayer Identification Number (TIN) or Social Security Number (SSN).
- Details of payments received through payment processors (like Venmo). If you don’t know where to find your TIN or SSN, contact a tax professional or the IRS.
- Carefully follow the instructions on Form 1099-K to complete the following items:
- Name, address, and TIN/SSN,
- Income information:
- Total amount of payments received through payment processors ($20,000 or more);
- Number of transactions (200 or more).
- Starting with tax year 2023, the minimum threshold has been reduced to $600.
- Send the completed Form 1099-K to the IRS as required.
- Retain a copy of the Form for your records.
Notes: If you are a freelancer or business owner, remark that Form 1099-K can be issued to either you personally, an individual, or your business, a legal entity.
Common mistakes to avoid when filing Form 1099-K
Payment card companies, payment applications, and online marketplaces are subject to tax reporting requirements. When filing Form 1099-K, many users of payment processors like Venmo make common mistakes that can result in penalties or delays in processing. For example, the penalty for each incorrectly filed form is $100. Since the tax year begins on January 1 and ends on April 15, the penalty for a delay within 30 days is $60; after 30 days, the penalty is $120. If you file after August 1 or don’t complete the required Form 1099 at all, the penalty is $310.
To avoid penalties, it’s crucial not to overlook the need to report the entire amount you receive through Venmo, even for small transactions. The IRS tracks this data, and omitting even a small amount can lead to complications – this is the most common issue that prompts Venmo users to seek assistance from experts. Additionally, ensure that your personal information, such as your name, address, and taxpayer identification number (TIN or SSN), is accurate and matches IRS records, financial analysts at Rates warn.
List of typical errors:
- Skipping small transactions.
- Incorrect personal information.
- Missing copies of documents.
- Using a personal account for business.
Avoid these mistakes so that the Form 1099-K filing process goes smoothly and without unnecessary complications. When in doubt, consult a tax professional.
Notes: The IRS may waive or reduce penalties if you acted in good faith and can show reasonable cause for the late filing. If you meet these criteria, you’ll receive a Notice 972CG, which requires a response within 45 days (or 60 days if you’re a foreign filer). Crowell & Moring LLP is well-versed in the statute of limitations for Form 1099-K filings and the consequences of willful violations of tax laws. If you have any questions, you should always consult your tax advisor or contact the IRS directly.
Executive Summary
As more Americans turn to online payment applications for business transactions, the IRS has lowered the reporting threshold for Form 1099-K. If you’re one of the one in four Americans who use Venmo (according to Oberlo), understanding how to accurately and timely report your income is critical to avoiding penalties when filing with the IRS.
In 2023, the IRS updated the reporting threshold for transactions from a single account, whether personal or business, to $600. It’s important to avoid common mistakes such as overlooking small transactions, providing incorrect personal information, and mixing personal and business accounts. Remember, it was tax evasion, not his notorious criminal activities, that led to Al Capone’s imprisonment.