2023 Digital Payment Tax Reporting Requirements

Venmo is a mobile payment app and digital wallet owned by PayPal which, since 2009, has made sending and receiving money easy. Once an app for sending money between family and friends has since gained popularity among businesses.

In February 2021, Venmo launched Business Profiles, allowing businesses to accept payments through the Venmo app. Since then, there has been a significant increase in the number of businesses that have adopted the use of Venmo. Along with this increase came many other mobile payment service companies such as Cash App, Stripe, Google Pay, Apple Pay, and Square, gearing their services toward businesses. As the mobile payment industry picks up speed there have been some updates to the tax laws surrounding it. Business owners will want to take note.

Tax Laws for Business Use of Mobile and Online Payments

Form 1099-K Threshold

Business owners who use mobile and online payment services will receive Form 1099-K at the end of the year from each service company to report their gross amount of all payment transactions. The IRS has recently issued a one-year delay for the $600 tax reporting threshold rule for Form 1099-K. This rule was initially set to be in effect for the 2022 year but now will take effect for the 2023 calendar year. Before 2022, payment services were required to issue Form 1099-K to a taxpayer when payments through payment apps aggregated above $20,000 with more than 200 transactions. Although this rule now remains for the 2022 year. During the 2023 calendar year, any number of transactions totaling $600 could require form 1099-K if they are marked as a business transaction.

Designating Transactions as Goods and Services vs. Family and Friends

Apps like PayPal or Venmo allow users to designate what each transaction is for. Transactions labeled as “family and friends” are not reported as business income while transactions labeled as “goods and services” are. On the Venmo app, users sending money are prompted if they would like to label their transaction as goods and services to provide assurance on their transaction. If users sending you money are designating their transactions as “goods and services” and you exceed the $600 threshold during the 2023 calendar year, you may be issued Form 1099-K at the end of the year.  Your requirement to report this income on your tax return is not dependent upon your receiving a Form 1099-K, all income received by your business must be reported on your tax return.

Mobile and Online Payment Tax Laws Vary by State

Some states have lower reporting thresholds for the 2022 year. While the IRS is now continuing the threshold of $20,000 and 200 transactions in 2022, some states are sticking to the lower threshold of $600. These states include Maryland, Massachusetts, Vermont, and Virginia. To determine whether specific amounts on your 1099-K are classified as taxable income, you should speak with a tax professional.

Backup Withholding Laws

Payment service companies are required to withhold 24% of all business payments and send it to the IRS for backup withholding. Some companies allow you to provide your tax ID and avoid these backup withholdings from coming out of your payments. Once backup withholdings are taken out of your payments and sent to the IRS they cannot be returned to you but you can report these withholdings on your tax return.