Many small businesses like to use Venmo to pay their contractors. Compared to traditional bank transfers or credit card payment systems, it’s a quick and convenient way to handle money transfers. Everything can be done from your phone, and the transfer happens instantly. And, it’s free if you transfer the funds from your bank account! But, as convenient as it is, there are a few things you need to be aware of before using Venmo for your business. First, let's look at how the IRS is changing payment reporting requirements.
Business Reporting Rules Are Changing
The IRS is changing its requirements for payment processors that transfer money via bank payments or credit cards. Starting January 1, 2022, the American Rescue Plan Act lowers the aggregate payment threshold for third-party settlement organizations (TPSOs) filing a 1099-K from $20,000 to $600. Like the requirement for 1099-NEC payments to contractors, the TPSO will have to issue 1099-Ks when annual payments to a contractor or other business exceed $600. Many payment processors started issuing 1099-Ks for the 2020 tax year to test their systems and to meet state requirements (see note at the end of the article.)
As a result, if you are paid as a contractor, you should expect to receive 1099-Ks when you are paid through a TPSO. Likewise, if you pay contractors and other businesses via a TPSO – PayPal, Skype, Square, QuickBooks, and others – you don’t need to send the contractors 1099-NECs when the annual payments exceed $600. The TPSO does it for you and is one reason you are charged a transaction fee for the payment.
What About Venmo?
Venmo is a payment processor created by PayPal for personal financial transactions. For example, when you go out to a restaurant with friends and family and wish to split the bill between yourselves. These kinds of personal transactions don’t need to be reported on your tax return and are perfect for Venmo.
Because bank transfers are free, easy to use, and popular, Venmo has become one of the dominant ways to transfer funds electronically. Therefore, it’s only reasonable that businesses want to offer Venmo as a payment method. Since 2016, Venmo has offered business accounts to businesses and independent contractors who want their customers to use the Venmo apps for payments.
The Venmo personal and business accounts are entirely different. Even though PayPal owns Venmo, the personal version of Venmo is not a TPSO and is not required to issue 1099-Ks.
If you use the personal version of Venmo for business transactions:
- Your business must keep detailed records (receipts and invoices) of all of your transactions.
- You are responsible for filing 1099 forms to your vendors and contractors that you pay through Venmo.
Payments made through the personal version of Venmo are the same as paying with cash. It is like paying your business expenses with dollar bills. Remember, in an IRS audit, cash payments get extra scrutiny. Detailed receipts and extra recordkeeping are required. Likewise, an entry into QuickBooks may not satisfy an IRS auditor unless you provide additional documentation.
In My Opinion
With the large number of cash transactions taking place through Venmo, it is hard to believe that the IRS won’t require Venmo to increase its scrutiny of the personal cash transactions flowing through the system. As a result, the company may crack down on small businesses using the personal version to avoid paying transaction fees. Venmo clearly states in its User Agreement that it reserves the right to block customers who misuse the service. Unlike a lot of website user agreements, Venmo’s is amazingly clear. Read it here: https://venmo.com/legal/us-user-agreement/
If your business uses the personal version of Venmo to make payments, now is the time to consider setting up a Venmo business account for your payments to contractors and other service providers. Your clients and customer will still be able to pay you from their personal Venmo accounts, but your business account will meet the IRS requirements for receiving payments, and you will be in compliance with Venmo’s user agreement.
More Information
Venmo: Business Profiles Tax FAQ
Note: Several states already require TPSOs to issue 1099-Ks at lower payment thresholds:
- Maryland, Massachusetts, Mississippi, Vermont, and Virginia require a 1099-K to be filed with the state tax agency if a TPSO pays a state resident $600 or more during the year.
- Illinois and New Jersey have a $1,000 1099-K threshold (plus, for Illinois, a requirement of at least four transactions).
- Arkansas has a $2,500 threshold.
- Missouri has a $1,200 threshold.