As one of the most used P2P apps in the U.S., one has to wonder how that translates in terms of your taxes. Does the IRS monitor Venmo transactions? This text provides all the information you need to know about how Venmo and the IRS, specifically how you can remain tax-compliant when using the platform.
Does Venmo report to the IRS? Venmo does report to IRS. By law, Venmo has to report when a user surpasses certain thresholds like receiving $20,000 in payment volume annually or if they receive more than 200 separate payments in a year. Once a person crosses this threshold, Venmo sends Form 1099-K to the IRS for that year.
Venmo is not a bank, but it does provide a valuable service to users. Venmo has more than 50 million users, and more sellers are warming up to the idea of receiving payments through the service. So, it’s only natural that the IRS is interested in ensuring users report any taxable income.
Some people see various P2P payment apps, including Venmo, as ways to avoid paying taxes on their income which is a misguided and risky view. Even Paypal reports to the IRS.
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Venmo and the IRS
If you just use Venmo for sending money to friends or family and just split bills, you have nothing to worry about.
That’s what the app is for; people who should have some concerns are people who use Venmo for business, and paying employees or contractors.
For example, a seller accepting payment via Venmo must understand that Venmo will report their activity once they break specific thresholds.
Venmo 1099-K threshold
Generally, P2p payment platforms have to report gross payments from people who receive;
- More than $20,000 in gross payments annually
- More than 200 separate payments in a year.
There are also state-imposed thresholds like,
Maryland, Massachusetts, Virginia, and Vermont residents have a reportable threshold of USD 600, irrespective of how many transactions are involved. Also, Illinois residents have a threshold of $1000 with three or more transactions.
When a Venmo user crosses either of these thresholds, the platform is obligated to send a Form 1099-K to the IRS and forward one to you too. The Form 1099-K for a specific year is sent in the early months of the coming year.
Who is Eligible for form 1099-K?
Form 1099-K tracks income received through third party methods like credit cards and payment services.
So, when your business exceeds the IRS thresholds above, you will be prompted to confirm some details such as;
- Name
- U.S taxpayer status
- U.S taxpayer identification number
They will send an email when you need to confirm these details, and you will also see the notification in the app. You will receive a link in the email or notification, which you need to use to confirm the information they need.
In case you have not confirmed your taxpaying status, and your account is approaching the thresholds, Venmo will place some restrictions on your profile. Removing the restrictions by following the prompts they provide via email.
Note that even though a person fails to receive a Form 1099-K, they are still obligated to report any taxable income received through the platform.
How Venmo Tracks Payments
Venmo tracks all transactions through a tab on the app. The company does not specify what the money was for and only includes what you type in the amount box before receiving or sending funds.
This feature makes it possible for them to compile a statement for any month which you can opt to receive via email.
However, it will not be as detailed as a bank statement since Venmo does not record some specifics about transactions.
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Using Venmo for Paying Employees
Aside from receiving money through Venmo, some business owners can decide to use the app to pay their employees. Venmo offers a lot of convenience, but this is not recommended.
It is because Venmo is not very reliable in tracking transactions. It would be better to use solutions such as; Paychex or ADP to pay employees.
If you choose to use Venmo for paying employees, you will have to make payroll tax deposits weekly or monthly. Making tax deposits can get tedious, and that’s what lands business owners who opt for Venmo to pay employees in tax trouble.
You need to send each employee you pay more than $600 annually a 1099-misc form. It is because the income is taxable and should be reported. Venmo will send a Form 1099-K If you meet or exceed the thresholds.
Other owners just use the app to reimburse employees for business expenses. It is an easy way to do it, but you should ensure every expense is documented in an expense report. There are various apps you can use for a detailed expense report like;
- Divvy
- Expensify
- SAP Concur
Or you can just choose to do it the old-fashioned way with a pen and paper.
Paying Independent Contractors via Venmo
Independent contractors and employees should be handled separately to avoid confusion leading to tax troubles. For contractors, you should issue form 1099-Misc towards the end of the year. The recipient of this document should have completed the Form W-9 before you issue any payment to them via Venmo.
From there, the employer needs to report the information on the “Non-employee Compensation” section or Box 7. It shows that their income is subject to taxation and thus has to be reported to the IRS. Good record-keeping is essential when paying contractors with Venmo, and without it, some payments might even be disallowed in case there is an IRS audit.
Final Thoughts
Venmo is built around offering convenience, and that’s one of the major reasons it is so successful. However, it is not the best option for business transactions since it limits itself when tracking transactions. There are also times when your payment can be declined.
So, it will require an employer to be very keen, especially when making weekly or monthly tax deposits. Also, the fact that it is not federally insured raises another concern. But, users can also make it work for business.
All you need to do is conduct due diligence and always keep detailed income records earned from all sources. It will ensure you are accurate when reporting income. Even if you have not received your Form 1099-K, it is necessary to report your income, and you should even track it outside of Venmo to be safe.