The Complete Guide to Venmo 1099 Taxes for Freelancers and Small Business Owners
Here's everything you need to know about Venmo 1099, tax regulations, and how to use it as a small business owner or an independent contractor.
Using Venmo is easy, we get it. It's a quick and convenient way to handle your money transfers, compared to traditional bank transfers. Everything can be done straight from your phone and the transfer happens instantly. As convenient as it is, there are a few things you need to be aware of before using Venmo for your business.
The thing is, numerous freelancers, entrepreneurs, and small business owners start using Venmo for their business, and end up committing costly mistakes only because nobody warned them. And by costly I don't mean having to pay a late fee to the IRS, I mean spending weeks clearing up the mess, getting locked out of accounts, or overpaying thousands of dollars in taxes.
Don’t worry. We've covered everything, from setting up your account, handling transactions, to what tax forms you're going to work with, so you can successfully start using Venmo for your business today!
What is Venmo?
Venmo is a payment processor made by PayPal, for personal financial transactions. For example, when you go out to a restaurant with friends and family and wish to split the bill between yourselves. These kinds of personal transactions don't need to be reported on your tax return and are perfect for Venmo.
Due to the ease of use and popularity, Venmo has gained massive traction in the last couple of years. Therefore, it's only reasonable that it caught businesses’ attention who wish to offer Venmo as a payment method. Since 2016, Venmo is offering business accounts to businesses and independent contractors.
Here's the first important point: Even though Venmo is owned by PayPal, which is a payment settlement entity, Venmo is not one itself. This means two things:
- You must keep financial records of all of your transactions yourself
- You are responsible for filing 1099 forms to your vendors and contractors
Venmo business account
From the moment you begin to use your Venmo account for your business, your account will be meticulously tracked and all of the activity reported to the IRS. Therefore, you should create a separate Venmo business account right away and avoid mixing your business transactions with your personal finances.
Beyond mere convenience, there are several reasons to do this:
- By using your personal account for business finances you are violating Venmo's terms and conditions and risk getting your account flagged or suspended. PayPal support is notoriously bad, so staying on good terms is paramount.
- Having a separate account for your business activities will help you separate your personal finances from business. If you are not doing it, you risk having to pay income tax on all your received payments.
The IRS considers Venmo transfers unsubstantiated. This means there must be matching documents such as receipts, expense rapports, and invoices to explain the activity since Venmo transaction history doesn't provide enough documentation itself.
It helps to think of Venmo as a cash payment because in the eyes of the IRS it's the same thing.
Proper bookkeeping is your best option to cover your end. Traditionally, it involves saving receipts, invoices, and typing them up into 1099 excel sheets. A more modern solution is to use online tools like Keeper Tax, which will essentially do all the bookkeeping for you and help you figure out your taxes and monitor your business account.
Venmo for merchants and form 1099-K explained
Form 1099-K is issued by third party payment networks, such as Venmo, to the IRS to provide information about transactions made through their service.
Merchants and retailers relying heavily on Venmo can expect to receive a Form 1099-K from PayPal by January 31st. According to the US tax law, PayPal will send you a Form 1099-K, when your business account meets certain criteria.
You will receive one if you had over 200 transactions and $20.000 in gross payment in the last tax year. It includes all the payments made through Venmo, be it refunds, reimbursement, paying vendors, contractor, as well as incoming payments for your goods and services. All that income is considered taxable business income and if you wish to deduct your expenses, you need documentation to do so. That's why it's so important to document all of your expenses and keep organized records.
What to do if you don't receive a 1099-K from Venmo
If you didn't meet the above criteria, you won't receive a 1099-K, and you're going to have to find documentation for your income yourself.
To do this, access your Venmo account through a web browser and navigate to the “Statements" section. Note that you can't access your transaction history through your mobile browser.
Once you know your gross income, you can proceed to fill out your Schedule C to deduct your expenses and calculate your self-employment taxes on Schedule SE. If you are curious about calculating your self-employment taxes, use our free online income tax calculator.
Receiving payments with Venmo
The payments you receive through Venmo from your customers are considered taxable income. Like with cash payments, you are responsible for documenting and maintaining a record of those transactions. Failure to do it will result in fees and problems with the IRS.
Once all of your income is documented, it must be reported on the appropriate IRS forms and filed along with your other tax returns. The deadline for returning your 1099 taxes, are the same as with the other tax forms, before April 15th.
You can find all the appropriate tax forms and see important updates on the IRS’s official website: www.irs.gov
Retailers who let their customers pay with Venmo, must also save receipts and maintain your records for at least three years, either digitally or on paper.
Paying for business expenses with Venmo
You can use Venmo to pay for a wide range of business expenses. Depending on who you pay and what for, there are a few different rules the IRS expects you to follow.
If you have paid someone more than $600 per year, you must send them and the IRS a 1099-NEC or 1099-MISC form
Paying your vendors
If your vendor allows it and you wish to do so, you can pay your vendor with your Venmo business account. In this case, you must keep the receipt or the invoice of your purchase and rapport that expense accordingly. This also means you must send a form 1099-MISC to your vendor if you paid them more than $600 the last calendar year, no matter what platform you’ve used to pay them.
Paying independent contractors
When you are hiring independent contractors for their service, you can pay them nonemployee compensation through Venmo. However, since Venmo isn't a payment settlement entity, you are responsible for sending them a Form 1099, because Venmo won't.
If you paid a contractor more than $600 last calendar year, you must send form 1099-NEC yourself, no matter what platform you used to pay them.
Reimbursement with Venmo
When an employee needs reimbursement for business expenses, you can use your Venmo business account to quickly pay them. For example, if you need your intern to swing by a store and pick up some office supplies.
Each of the expenses needs to be documented on an expense rapport with a receipt. Otherwise, you won't be allowed to deduct them. To do this, you can either manually create an expense statement or use a service such as Keeper Tax to do it automatically for you.
Venmo is great for personal use, and convenient for the payment method for customers. But if you wish to implement it in your business, you are going to take a few extra steps and maintain detailed records yourself. Payment service providers like PayPal and Stripe are better suited for businesses and the self-employed. They won't send form 1099's for you, but they are much better suited for bookkeeping purposes.
E-commerce platforms and electronic payments continue to develop, but the US tax law remains the same. To make taxes easier, we recommend Keeper Tax. By monitoring your business accounts in real-time, Keeper Tax maintains your books and finds all the write-offs you’ve been missing out on. So, when the tax season rolls around, all of your finances are in check, your expenses are deducted and you don’t have to worry about it anymore.
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At Keeper Tax, we’re on a mission to help freelancers overcome the complexity of their taxes. That sometimes leads us to generalize tax advice. Please email firstname.lastname@example.org if you have questions.