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2023 Tax Season: Guide on Handling Your Taxes When You Receive Payments Through PayPal, Venmo, and Others

IRS: payments received through electronic payment services like PayPal, Venmo, and others should report as an income in their Schedule C of Form 1040.
IRS: payments received through electronic payment services like PayPal, Venmo, and others should report as an income in their Schedule C of Form 1040. (Photo: Marca)

The Internal Revenue Service has changed the rules using electronic payment processors like PayPal and Venmo. The agency implemented the change on January 1, 2022, where payment apps are required by law to report business transactions of at least $600.

However, the IRS announced on December 23, 2022, that they would revert to the previous thresholds of $20,000 and 200 transactions. The recent change would apply to the 2023 tax filing season and would delay the reporting for payment apps by a year.

The rule of reporting at least $600 would apply for the 2024 tax filing season. With the confusion on the IRS regulations, GoBankingRates lists some guides on handling your taxes if you’re paid through PayPal, Venmo, and others.

Payments from Friends

Fortunately, receiving money from friends and family remains untaxable. You don’t need to report to the IRS if you receive a personal payment. Just indicate the “payment to friends” or other similar labels instead of the business payments. If you marked it as a business payment, the deduct the payment as a business expense would reflect on the sender’s profile, and the recipient would have a label as income on their tax return.

Business Payments

The IRS has changed the threshold to $600. Business payments received via electronic payments must be reported as income. According to the current law, the payment processors will report the transaction to the IRS.

Those who used to avoid declaring money as an income in the past are simply out of luck. The IRS now has the record of those payments; if you fail to report them as an income, you might receive an audit letter – assessed for fines and penalties or worse, subject to criminal charges like fraud.

Find out: 2023 Tax Season Guide: How to Get Better Tax Refund This Year 

More: 2023 US Tax Season and Taxation: Understanding State vs Federal Income Taxes

Schedule C of Form 1040

Once you’ve received payment via PayPal, Venmo, and other payment processing services, you must report this income on Schedule C of Form 1040.

An advantage of declaring the payment an income is that you can declare it as a deduction for business expenses. It would be best to ask your tax advisor what is allowed and how it works.

IRS: Taxpayers who receive payments of more than $600 through electronic payment services like PayPal, Venmo, and others are required to declare it as income on their tax return.

IRS: Taxpayers who receive payments of more than $600 through electronic payment services like PayPal, Venmo, and others are required to declare it as income on their tax return. (Photo: Freshbooks)

Self-employment Tax

If you have side gigs, but do not consider yourself a self-employed worker, the IRS will still require filing for self-employment tax. You are required to file if your net income is more than $400. Since the IRS considers you self-employed, you must pay 15.6% of your net self-employment earnings minus deductions.

Self-employment tax is an addition to Medicare and Social Security contributions. In contrast to freelancers and self-employed, employees of a company are required to pay 7.65% self-employment tax. The employer would pay the other half.

Read More: IRS: Side Gigs can be Taxable 

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