PayPal and Venmo taxes: What you need to know for your 2023 tax return

Close up of a customer scanning a qr code to pay for a drink from a barista.Image: Close up of a customer scanning a qr code to pay for a drink from a barista.

In a Nutshell

The IRS has delayed a tax rule requiring payment platforms like Venmo and PayPal to send 1099-K forms to sellers who receive more than $600 in income a year. The agency plans to introduce a $5,000 threshold for 2024. 
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If you use an app like Venmo or PayPal to collect business payments, take note: The IRS has delayed a rule requiring those apps to send you a tax form for reporting such transactions if they total $600 or more for the year.

For tax year 2023, the IRS will only require payment apps to send a 1099-K form — the form documenting income received via third-party networks and from payment cards — to users who made $20,000 or more in a year and conducted at least 200 transactions.

But starting with tax year 2024, the IRS plans to require Venmo, PayPal, CashApp and other online payments platforms to send a 1099-K to anyone who hits a much-lower $5,000 threshold.

The new rule doesn’t apply to personal payments between friends and family for things like shared meals or bills. It’s aimed at people with side jobs or small businesses who collect money online and may not be reporting the income as required.   

Here’s what to know about the updated 1099-K rules, plus tips to consider ahead of the change.

New requirements for 1099-K reporting

The IRS, which estimates unreported income of nearly $166 billion through payments on peer-to-peer apps like Venmo and PayPal, is using the new requirement to help close this “tax gap,” or money owed to the government that goes unpaid. The change is being phased in beginning tax year 2024 as part of the American Rescue Plan Act of 2021.

Under IRS plans to phase-in the new rule, payment processors like Cash App, Venmo and PayPal along with platforms like eBay and Etsy will have to send a 1099-K tax form to users with more than $5,000 in any number of transactions for goods or services in 2024.

Making sense of Form 1099-K

You can expect to receive a Form 1099-K from third-party networks or financial institutions for income you earned through the platforms the previous year. Under IRS rules, you’re supposed to report any income listed on your Form 1099-K from your business — including things like selling items on eBay or mowing lawns in your neighborhood — on your income tax return.

Who is required to file?

If you earn income outside of a full-time job and get paid via Venmo, PayPal or Cash App, or other types of third parties, you should refer to your Form 1099-K to determine what income to declare.  

This includes payments for personal items you sold, services you provided or property you rented through …

  • Peer-to-peer payment platforms or digital wallets
  • Online marketplaces
  • Craft or maker marketplaces
  • Auction sites
  • Car sharing or ride-hailing platforms
  • Real estate marketplaces
  • Ticket exchanges or resale sites
  • Crowdfunding platforms
  • Freelance marketplaces

Gift money from friends and family or reimbursements for personal expenses don’t have to be reported since they aren’t considered taxable income.

Zelle doesn’t report to IRS

Unlike its competitors, Zelle facilitates direct bank-to-bank transfers — and the company says it won’t be providing 1099-K forms to customers.

But if you’re using Zelle for business payments, you’re still required to report any income you receive via the platform that may be taxable — if you’re unsure what to report, it’s a good idea to reach out to a tax specialist.

How to prepare to file taxes

Because of the new IRS requirement, more taxpayers are likely to receive Form 1099-K for tax year 2024. You can be proactive by carefully tracking your transactions and planning for them to be reflected as part of your tax bill.

Save for taxes or make payments

Income taxes must generally be paid as you earn or receive income throughout the year, either through withholding or estimated tax payments. If you’re in business for yourself, you generally need to make estimated tax payments.

Keep good records

If you expect to receive a Form 1099-K, be sure to keep updated records of your transactions, balance sheet and other financial documents. Otherwise, inaccuracies when filing could trigger an IRS audit.

If you receive some or even all of your business income through a peer-to-peer payment platform, it’s a good idea to set up separate third-party platforms for business and personal transactions. If the transactions are intermingled, it will be tougher to separate business and personal payments.

Next steps

The new reporting requirement planned for tax year 2024 is expected to generate a flood of additional 1099-K forms as the lower reporting threshold affects more taxpayers. If you’re a gig worker or own a small side business, you may want to consider reaching out to a professional bookkeeper or accountant to help understand what your tax liability might be.

If you take steps now to prepare, you can be more confident about filing an accurate return and avoid processing delays.

About the author: Brad Hanson is a senior editor at Credit Karma. His 30 years of experience in print and digital media includes work for the Los Angeles Times-Washington Post News Service, and Polyvore. Most recently before… Read more.