Paypal and Venmo are clear in explaining their legal requirement to report to the IRS amounts over $20,000 or 200 transactions. But what about amounts under $20,000 and less than 200 transactions? The common questions are: “What if I don’t remember? How will the IRS even know?”.
The key issue is that business taxpayers who deduct business expenses and household employers face two steep requirements of their own outside of Paypal or Venmo’s requirement.
First, businesses are required to “substantiate” their deductible expenses. That means keeping details and records of the transactions: who, what, when and why. A simple record of a Paypal or Venmo transaction would not be sufficient to sustain the business tax deduction.
Second, the IRS requires business and household reporting of payments that total more than $600. In some cases even smaller amounts must be reported. The penalties for not reporting these are deliberately steep to ensure compliance. This year the IRS has a new form for reporting non-employee compensation and has moved the filing deadline up to January 31, 2021.
So while Paypal and Venmo do not report these smaller payments to the IRS, the payors and receivers of these funds who do not report the amounts to the IRS carry a potential financial liability if assessed for taxes and penalties in the future.
This is a dull accounting and tax topic that we would prefer to not have to deal with. In a perfect world, all of this would be handled automatically without any thought or effort. But if you’ve read this far then there is a chance that you have an unresolved tax compliance problem. If you would like to set up a system to have this handled correctly, automatically, without any worry, then I can do that. Just use the blue button to schedule a conversation where we can discuss the best approach to your situation.