As a small business owner, you most likely rely on digital payment services through third party networks like Paypal®, Venmo® or Zelle® to pay certain contractors and expenses. When do you need to report payment transactions to the IRS, and how can you do so accurately?
Types of payments – First of all, any IRS reporting requirement only applies to payments to businesses for goods and services – Neither you nor the payment settlement entities are required to report personal transactions such as payments to friends and family for sharing the dinner bill or repaying an acquaintance the $20 you borrowed.
Independent contractor payments with Zelle® – Unlike other third party networks or payment card processors, Zelle® does not settle funds, instead, it acts as a messaging service between financial institutions and individuals. The lack of funds settlement functions means that Zelle® has different reporting requirements compared to other types of payment processing firms. What this means for you is that It is your responsibility to issue a 1099-NEC or 1099-MISC if you’ve paid a contractor $600 or more throughout the calendar year using Zelle®.
The Form 1099-K, “Payment Card and Third-Party Network Transactions” is an information return that ensures the proper reporting of payment card and third party network transactions by Payment Settlement Entities (PSE).
Independent contractor payments with Venmo® – your reporting requirement will depend on how the payment was tagged and what type of account profile is receiving the payment. If you issue a payment to a personal account for more than $600, you need to tag the payment for goods and services so Venmo® will issue the 1099-K to the IRS and to your recipient. If you fail to tag the payment as goods and services, Venmo® will not include that payment on a 1099-K and you will need to issue a 1099-NEC or 1099-MISC to report the payment to the IRS and the recipient. If you issue a payment for more than $600 to a business account, payment tagging is not necessary as Venmo® will issue the 1099-K to the IRS and your recipient since payments sent to business profiles are automatically tagged as payments for goods and service.
Independent contractor payments with other third-party payment networks such as Paypal®, Stripe®, CashApp®, etc – if you send a payment of $600 or more to a business account, the payment processor will issue the 1099-K. If you send a payment of $600 or more to a personal account, the payment even if tagged as a payment for goods and services may or may not get reported on the 1099-K. You should check with the payment processing company to verify who is reporting the payment.