This is what you need to know

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Angie Noll is the owner of Reconciled Solutions. She is a Certified Profit First Advisor and has an MBA from Loyola (Chicago).

Beware, business owners and side-giggers: You are subject to taxes on your earnings when you collect payments from peer-to-peer apps like Venmo, PayPal, and CashApp. To be clear, this is not a change in tax law, as this income was already taxable; it’s just a change in reporting, with these providers now requiring users to send tax forms for payments over $600, and the IRS can use mobile money apps during the auditing process.

In my business, I coach many aspiring entrepreneurs on whether or not to have a solid business plan and the confidence to quit their day job and turn their side business into a full-fledged business. These new entrepreneurs often collect mobile money app payments from their customers when they are in the feasibility stage of starting their business.

I also come across many business-to-consumer entrepreneurs, such as wedding DJs, family photographers, movers, and hairstylists, who prefer customers to pay them for services through mobile money apps. It is a very widely accepted form of payment in their industries.

These are examples of areas where, if the provider accepts more than $600 in a year through apps like Venmo, PayPal, or CashApp, they must file a 1099-K to report their earnings. Keep in mind that the IRS doesn’t care if you go out to dinner with a friend and pay your share through an app or if you pay your share of the rent through a cash app. These are examples of paying money exchanges between friends and family and do not apply to the requirements set forth in the American Rescue Plan Act of 2021.

If you find yourself regularly receiving payments from customers through third-party apps, here are some things you need to know to prepare yourself for success.

1. Create a separate business account with the money app of your choice. For example, when using Venmo, PayPal, CashApp or Zelle, you can set up a separate bank account for personal use and a separate bank account for business use. (Note that if you are using the Zelle app, your transactions are not reported automatically to the IRS, while Venmo, PayPal, and CashApp are required to report transactions to the IRS. It is your responsibility to report taxable business transactions collected through Zelle to the IRS.)

2. Don’t try to hide your transactions. I’ve seen many try to monetize business through peer-to-peer apps by leaving the settings on their account subscribed to “friends and family” instead of changing the settings to “goods and services.” This is an attempt to avoid recording earnings when earnings are made. I do not recommend this strategy; it is illegal and failing to record business income can certainly have serious consequences. Plus, it makes it hard to see if it’s a sustainable lifestyle choice for yourself if you don’t respect both the revenue and cost sides of doing business.

3. Separate personal and business bank accounts. If your business takes off and you actually incur expenses while doing business, you should separate your banking into a business and a personal account. By doing this, you create the opportunity to deduct expenses from your revenue generated by your products and services. This is a legitimate business write-off, so take advantage of it! For example, if you need to buy a new lens or camera for your photography business, you can write off those costs and take advantage of this opportunity to reduce your net income.

Final Thoughts

Times change and peer-to-peer money exchange apps certainly make life easier when it comes to refunding money to a friend. Thank goodness for advancement in technology. I don’t think kids even learn how to write a paper check in school anymore. That said, it’s no surprise that the IRS has found a way to make sure we pay taxes on another facet of how we make money. While not everything is clear about how the IRS will fully document and enforce the reporting change, rest assured that reporting earnings on money apps is definitely here to stay, and we need to add the cost of staying compliant to our calculations at measuring the success of a company.

The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.


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