Why payment apps are asking for your Social Security number

If you collect more than $600 in business payments on a platform like Venmo or PayPal in 2022, the IRS will know about it.

Tanza Loudenback

By

Tanza Loudenback, CFP®

Tanza Loudenback, CFP®

Contributing Reporter & Certified Financial Planner™

Tanza Loudenback, CFP® is a contributing reporter and Certified Financial Planner™ at Policygenius, where she covers personal finance and insurance news. Previously, she was a senior reporter and correspondent at Business Insider.

Published|6 min read

Policygenius content follows strict guidelines for editorial accuracy and integrity. Learn about our editorial standards and how we make money.

If you’re a regular user of Cash App, Venmo, or another mobile payment app, don’t be alarmed if you get a notification asking you to provide your tax information.

As the side hustle economy explodes, the IRS is now requiring digital payment apps to submit records for each user who receives more than $600 in business-related payments during the year.

Digital payment platforms have the responsibility of reporting the total amount of money users collect for “goods and services” to the IRS using Form 1099-K. A copy will also be sent to the user.

“I personally think the new reporting requirement is going to cause a lot of confusion about how much and how to report income,” says Lisa Niser, a tax and financial advisor. “It is even more important than ever before to keep meticulous records so you can easily support the income and expenses reported on your returns if the IRS ever questions you.”

The previous annual reporting threshold for these so-called “payment settlement entities” was $20,000 and 200 transactions per user. The much lower threshold means that the IRS will have income records for even modest earners to ensure taxes are paid on their independently earned income.

Read on to find out how the new rule affects you.

What do I need to do now?

If you primarily use payment apps for splitting bills, paying for goods and services, reimbursing friends, and gifting money, you won’t be as affected by the changes as people who use the platforms to get paid for their services or sell products. You’ll still be asked by the apps to update your tax information, but you won’t be getting a 1099-K unless you receive more than $600 in business-related payments.

If you get an email or text notification from a payment app to provide your tax information by following a link, don’t click it. It could be a phishing attempt — scammers are likely aware that these companies are requesting sensitive information from users right now. Err on the side of caution and log in to your account directly through the website or mobile app.

Venmo and its parent company PayPal are asking users to provide or confirm their taxpayer identification number in their accounts as soon as possible. Cash App users with a business account can update their taxpayer information through the desktop app.

In most cases your taxpayer identification number is your Social Security number; if you don’t have one, then you may have an individual taxpayer identification number (ITIN). If you run a business account on the platform where you receive payments, you can use your employer identification number (EIN).

Venmo and PayPal did not respond to a request seeking comment on their plans to implement the new reporting rule. According to an update on Venmo’s website, users who reach the reporting threshold for their state (in most places it’s the same $600 threshold the IRS uses) but haven’t updated their tax information will have incoming payments placed on hold.

Payment platforms have until Jan. 31, 2023, to send 1099-Ks to users for the 2022 tax year (that means you don't have to worry about it when you're filing taxes this year). Again, users who don’t receive payments marked as goods or services won’t have records of their transactions sent to the IRS.

When it comes to filing taxes, it should be “business as usual” for freelancers and business owners, says Dondrea Owens, a certified public accountant and the founder and chief financial officer of The Creative's CFO. She says these taxpayers are still responsible for keeping their own records and reporting income they receive from a payment app or otherwise. 

The new reporting rule, Niser says, “only applies to business accounts so this is another reason why it is so important to keep business and personal transactions separate.”

Which payment apps have to report users’ earnings?

The reporting law was approved last March as part of the American Rescue Plan Act. It applies to credit card companies and other businesses, including mobile apps that handle payments for goods and services. 

Cash App, Venmo, PayPal, Square, and Stripe are all subject to the new rule, as are Uber and Lyft, because drivers are paid by riders directly in the app. 

The $600 reporting threshold applies to every payment platform individually (except in the case of the ride-hailing apps, where there’s a separate $600 threshold applied to earnings). 

For example, if you accept $1,000 in business-related payments on Venmo and $450 on Square for the year, only Venmo will have to report your transactions to the IRS. But you should still report all the payments you received from both platforms, as always.

Zelle, a money transfer feature available within some banking apps, is not required to report transactions. “Payments between friends and family, and eligible small businesses sent through the Zelle Network are not subject to this law because Zelle facilitates messaging between financial institutions,” according to a spokesperson for Early Warning Services, the network operator of Zelle.

Which transactions are goods or services vs. personal?

The IRS is only asking for records of payments received while conducting business. Any good or service you provide for a profit, such as the fee you charge for walking the neighborhood dogs, could count.

Uber, Lyft, and other apps that are non-personal in nature categorize most payments automatically. Apps that allow both personal transactions and business transactions, such as PayPal, Venmo, and Cash App, are likely going to rely on users to accurately tag payments as goods and services or personal. 

Using a specified business profile for transactions deemed goods or services can keep you organized, Niser says. That way, all payments show up on your 1099-K and you can report them on your tax return where appropriate. 

However, some purchases and sales aren’t so clear cut. Let’s say you sell an old couch. Venmo and PayPal would encourage the buyer to mark their payment as a good/service, in part because it makes both people eligible for purchase protection.

If you sold your couch for more than you bought it for you might earn a profit, but the platform leaves that up to the IRS to figure out. The couch sale price will be added to any other payments you received throughout the year and listed on your 1099-K. 

Both you and the IRS will receive a copy of the 1099-K before the tax deadline next year. You can use that form to fill out your tax return. There are various ways to report the income from the sale of personal property, like a couch. It’s smart to get in touch with a tax advisor for help.

Image: The Good Brigade / Getty