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Venmo is an expedient platform for transferring, receiving, and soliciting money. However, using Venmo for certain categories of transactions may result in the imposition of levies.
The fortunate tidings are that individual transactions on the payment platform typically don’t give rise to levy liability. The need for preparation of a levy bill arises only when Venmo is used for business purposes.
If you have questions regarding the functioning of levies on Venmo, continue reading. You will discover which Venmo transactions the Internal Revenue Service deems taxable and the essential details for tax preparation. We’ll also elucidate some imminent levy alterations for Venmo and other payment apps that necessitate preparation in 2024.
Entire coverage: Levies 2024 — Everything you need to file your levies on time
How the IRS handles Venmo transactions
When you’re transferring money to friends and family using Venmo, there is generally no need to fret about paying levies or reporting the transactions to the IRS. Nevertheless, if you utilize Venmo or other peer-to-peer payment platforms, such as PayPal or the Cash app, for business payments and intentions, you’ll be obligated to report the earnings and pay levies on the money received.
Here are some illustrations of transactions that you don’t need to report to the IRS or reconcile income levies on:
Your friend transfers money to you through Venmo to cover their proportion of a meal or Uber ride.
Your mom Venmos you money as a birthday gift.
Your roommate sends their half of the rent and electric bill to you via Venmo.
However, if you use Venmo to gather payments for your small business or side hustle, or you’re vending items for a profit, you will need to report the earnings to the IRS and pay levies on it. Here are some examples of Venmo transactions that lead to reporting obligations, as well as levy liability:
You’re a business owner vending T-shirts and crafts on Etsy and receive payments through third-party apps.
You walk dogs or clean houses as a side hustle, and your clients pay you through Venmo or a similar platform.
You’re a freelancer who receives payments through Venmo.
You vend your old couch for more than you paid for it, and the buyer Venmos you the payment.
Note that these levy-reporting obligations apply irrespective of the method by which you receive the money you earned. You’re mandated to report income and profits to the IRS and pay levies on that money. The manner of payment, whether it is cash, check, direct deposit, credit card, or a third-party app, does not affect these obligations, which do not alter significantly from year to year.
However, the rules for obligatory reporting of earnings from payment apps to the IRS and provision of tax documents are evolving. Here’s where it gets perplexing.
Read more: Can you use a credit card on Venmo?
Levy reporting alterations for Venmo and PayPal in 2023 and 2024
Taxpayers receiving payments from third-party apps such as Venmo, Zelle, or PayPal, as well as those who receive payments from credit cards, debit cards, or gift cards, may receive a tax document called a Form 1099-K. Under certain conditions, a payment-processing company or third-party app will transmit information about the earnings to the IRS through Form 1099-K and dispatch a copy by Jan. 31 for the preceding calendar year.
The change lies in the lowering of the Form 1099-K reporting thresholds for Venmo, PayPal, and analogous apps by the IRS.
The American Rescue Plan, a COVID-19 relief package ratified in 2021, encompassed a provision mandating payment services like Venmo to furnish users with tax form 1099-K if they were parties to business transactions of $600 or more.
The new directive was initially planned to become effective for tax year 2022; however, the IRS deferred its implementation due to apprehensions about taxpayer confusion. In late 2023, the IRS announced that it would once again defer the heightened reporting threshold by an additional year and phase in the lower requirement.
For the 2023 tax year (for which returns are due on April 15, 2024), the old tax reporting thresholds will hold. You’ll receive Form 1099-K from Venmo, PayPal, and other third-party apps if:
You have payment transactions for goods and services sold that exceed $20,000 and more than 200 transactions. (Note that the states of Maryland, Massachusetts, Vermont, and Virginia have tax reporting thresholds of $600, while Illinois has a reporting threshold of $1,000 if you’ve had at least four separate business transactions.)
You’re subject to backup withholding, which the IRS may require if you haven’t provided an accurate tax identification number or you’ve underreported dividend or investment income in the past.
In addition to its phased approach, the IRS will institute a lower threshold of $5,000 for payment platforms in 2024, which will be applicable to tax returns due in 2025.
How to evade levies on Venmo
If you’re self-employed and receiving payments through Venmo for work, or you’re vending items for profit, you’ll unquestionably be liable for levies on that money. You will be required to report that income when you file your levy return, irrespective of your receipt of a Form 1099-K. If you have any queries concerning whether a transaction constitutes taxable income, seek guidance from a tax expert.
You can’t sidestep the levies by switching to a different payment app. Other peer-to-peer payment platforms, including PayPal, Stripe, and Square, are subject to the same rules. And you’re responsible for reporting earnings and paying levies on the earnings, regardless of the mode of payment — even if you don’t receive a 1099-K.
However, there are a few scenarios in which you may face a levy obligation for a Venmo transaction when there is no levy liability.
Be sure to confirm that payments your friends and family transfer you for gifts or reimbursements are not erroneously categorized as “goods and services.” If personal transactions labeled incorrectly surpass the reporting threshold for the year ($5,000 in 2024), you could get a Form 1099-K, notwithstanding the non-taxable nature of these transactions. Furthermore, you’ll incur fees on transactions that should be charge-free. If someone erroneously labeled a payment as “goods and services,” advise them to contact Venmo to rectify the mistake.
Ordinarily, you can avert paying levies on Venmo transactions if you vend items for less than you paid. If you sold less than $20,000 worth of items, you shouldn’t receive a 1099-K for the 2023 tax year, but you will receive one for 2024 if your sales exceed $5,000 as the new reporting requirements are implemented.
Even if you receive a 1099-K, that doesn’t automatically mean you’ll owe levies. For instance, let’s say you spent $30,000 on your car and then sold it on Venmo for $23,000. Even if you received a 1099-K from Venmo, you could declare the loss when you file your return and steer clear of any levy obligation. Keeping records of the amount you paid for any item you might sell in the future is crucial. Check with a tax adviser to prevent an unwarranted levy bill.
Will Venmo be subjected to levies in 2023?
You are obligated to pay levies on earnings accrued through Venmo in 2023, as well as other tax years. Nonetheless, the IRS has deferred the implementation of new Form 1099-K reporting thresholds. Most taxpayers will only receive a 1099-K levy form for 2023 if they garnered more than $20,000 in Venmo payments for goods and services, as well as at least 200 transactions. Nonetheless, you remain responsible for reporting Venmo earnings below these thresholds and paying levies on that money, even if you don’t receive Form 1099-K.
What is the $600 levy rule?
The $600 levy rule is a novel directive that will eventually necessitate third-party payment apps like Venmo, PayPal, and Cash App to furnish Form 1099-K for any user who earns more than $600 on the platform during a tax year. The new rule is postponed for 2023, thus having no effect on users during the tax season in 2024. A phased-in threshold of $5,000 will be applicable for the 2024 tax year.
Will I owe levies if I sold cryptocurrency using Venmo?
If you sold cryptocurrency using the platform, you’ll receive a gains and loss statement from Venmo. Irrespective of the platform used to sell crypto, your gains are subject to capital gains levies. Some of your gains might be offset by losses. Seek guidance from a tax professional regarding the regulations.