Money Rehab with Nicole Lapin - Calling All Venmo, PayPal, Zelle and Cash App Users: You Need To Watch Out For This Tax Issue

Episode Date: April 21, 2023

Say you throw your card down at brunch with friends and everyone pays you back via Venmo. Because of some changes to how the IRS collects income data from third party payment apps (Venmo, Zelle, etc.,), the IRS may mistakenly count that Venmo payment as income— and we definitely do not want that. Here's the intel on this change, and what to do if this happens to you. Here's your new fav form (be sure you're looking at the right form for the year in question): https://www.irs.gov/instructions/i1040sc

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money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. We've all been there. You go in, get your nails done, get your hair done, get a tattoo. And the artist says, hey, if you pay me with Venmo, I will charge you tax.

And in that moment, you know they're not really planning on paying income taxes on that money either. That little, I'm not going to call it a loophole because it's not actually legal, is about to end. And why it's about to end has major implications for anyone with a hobby business or who uses third party payment apps like Venmo to split drinks with friends pretty regularly. The change all comes down to the 1099-K form. Now, this is a big deal. The 1099-K form is a federal tax form

issued by third-party settlement apps like PayPal, Venmo, Zelle, Cash App, you know, all the biggies. Throughout this episode, I'm gonna just use Venmo as an example, but these changes apply to all the apps I just mentioned. This form is meant for those tattoo artists or manicurists, anyone who gets paid for their work via a payment app and

needs to declare that income. Until last year, these apps only issued a 1099k if you made over $20,000 or had more than 600 transactions in Venmo or whatever your preferred payment app is. That all changed with the American Rescue Plan. Under new rules, 1099-Ks will be issued to anyone who sent $600 or more in total in a third-party settlement app. Now, does that mean that you owe taxes on that $600? Not necessarily. You owe taxes on income, right?

We all know this. We just filed our taxes or an extension, hopefully. So just to put a really fine point on it, you will not owe taxes on any money you get on a third-party app that is not income. Like if you spotted your sibling, their share of flowers you sent on Mother's Day, your siblings pay you back. The IRS does not get a cut on that. But this change does mean that lots of people will be hit with a lot more paperwork come tax season. But thankfully, it's not this tax season. The change was supposed to go into effect in 2022, but the IRS delayed it because

of concerns that no one was prepared for this rollout. And honestly, they're right. This is a big change, especially for these three groups. Number one, people who don't use third-party apps for business. Now, there are some big Venmo stands out there. We all know this person. You're the one at the brunch that when the bill comes out, you offer to put the whole bill on your credit card so you get the points and then you ask everybody at the table to Venmo you. Or maybe you're the only one in your house with a checkbook so all your roommates Venmo you and you write the check for the house. And let's be real, even if you don't use Venmo that frequently, $600 over an entire year isn't that much. A concert ticket or two, a couple of

brunches, a baby shower gift. You could see how that could easily be over the limit pretty quickly. Now again, you don't owe taxes on any of the payments I just mentioned, and in a perfect world, Venmo would just know that. But this is not a perfect world, and this is the first time this rule has been in place. So at least a handful of people who are just trying to get reimbursed by a friend for two days at Disney are going to mistakenly be issued 1099k forms for non-taxable payments. If that happens, don't panic. But just know that you do not need to pay tax on that kind of money. But just know that you do not need to pay tax on that kind of money.

To rectify that, if it happens, you need to call the issuer, aka the company that sent you the form, not the IRS. So just start thinking about this now. And here is reason 584 to keep your receipts. Number two, my side hustlers. If you're a Poshmark or d-pop or real real queen who loves to purge your closet and get paid for it this can really hit you and this is where it gets tricky if you're selling things at a loss you don't owe taxes on them but if you're selling them at a profit you do for example let's say you were a bridesmaid in a wedding that got canceled during

COVID, and now you have a $400 dress that you won't wear anywhere ever. So you sell it on Poshmark for $300. No matter how many times you clean out your closet that way, you don't owe taxes on anything you make if you're selling it for less than you bought it for. On the flip side, if you thrifted something for $60 at your local Goodwill and then sold it on the RealReal for $100, you do owe taxes on that sale because you made a profit. And I think we can all see how this could get suddenly so very tricky for a lot of people. So in addition to keeping those receipts, make sure you have a dedicated business account on those resale apps.

This will make it a lot easier to separate out what you earned a profit on and what is just personal. Number three, cash businesses. There is a long history of cash-heavy businesses cutting tax corners and declaring less income than they actually made. This is not breaking news and it is definitely illegal, but it's done all the time. And when I say cash-heavy businesses, I'm talking about bartenders, tutors, babysitters, makeup artists, dog walkers. And listen, I'm just listing some of the common gigs

where this tends to happen. I'm not saying everyone does it. I'm also not the IRS. So I'm not here to make you feel bad if you've turned a blind eye to the system. But I am here to ring the warning bell if you haven't been paying income taxes on the money you earned on Venmo.

You're not gonna be able to get away with that this upcoming tax season. Because of the delay of this rollout, you have the entire year to start paying taxes quarterly, figure out if you should be using a business tax identification number, and all that fun big kid stuff. You can figure all of this out. You have the whole year to prep. I promise you've got this, but don't wait until the last minute to figure it out. And I know I only said I would give you three groups of people who would be heavily impacted by this, but I guess there's like three and a half. Because this new rule also really affects the third-party payment apps themselves. Venmo, like any other business, does better the more

users it has, right? Right now, these payment app brands are super stressed about how these new tax rules might cut the number of users or volumes of transactions. Venmo, like any other business, does better the more users it has, right? Right now, these payment app brands are super stressed about how these new tax rules might cut the number of users or volume of transactions. I've talked to a lot of folks inside these companies, and I got to tell you, they are not stoked and they're trying to figure out how to deal with it. They're anticipating that some small business owners will want to keep breaking the law and under-reporting their taxes. And so because these business owners won't be able to do that on Venmo anymore,

they're going to go back to pre-2000s days of actually using cash transactions, which is way harder for the IRS to track, but would also be less business for the apps. Hiya. It's a lot. Time will tell how these third-party apps will actually be affected, but I think we can expect to see these apps giving incentives to business owners to keep using their platforms or even focusing their efforts away from their business offerings for today's tip you can take straight to the bank remember earlier when i said you don't have to pay taxes on a loss that's true but you still do need to document that loss. And to do that, you guessed it, more forms. The Schedule C form to be exact.

And even though tax day has come and gone, as our friend the cool CPA said the other day, the best way to make tax time less stressful is to do a little tax hygiene all year round. So bookmark the Schedule C form I linked in the show notes. Tax stuff is hard enough, right? Try to make it easier on yourself and have some of the paperwork there when you need it. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Levoy. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have

your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.