Small businesses that accept or plan to accept digital payments need to know the tax implications associated with these services. Paypal and Venmo tax reporting is a key issue, and anticipating the effects of digital payments on your financials is just as important.
Today, I’ll explain the three most common mistakes associated with digital payments. As always, I have solutions for you, too.
First, let’s take a look at the business value and growth trajectory of digital payments.
Digital payments benefit businesses and consumers
What’s the big deal about digital payments? Here are three (among many) reasons that businesses are going digital.
- Reduced transaction cost
- Improved efficiency and accounting integration
- Payment options that open your business to new customers
According to Grand View Research, the global digital payment market size was valued at USD 81.03 billion in 2022. The market is expected to expand at a compound annual growth rate of 20.8% from 2023 to 2030.¹ Also, around 4 in 10 customers shop cashless, and that number is only going to increase.²
Three common digital payment problems—with solutions
Below I’ve put together a list of three common problems that impact Payal and Venmo tax reporting, as well as business operations and accounting for digital payments.
Problem #1: Staying profitable and compliant in a shifting legal landscape
Changes in federal and local laws impact Paypal and Venmo tax reporting, as well as other forms of digital payment. Keeping up with changes is time-consuming, but if your business fails to tailor its practices to the law, you risk getting slapped with a fine.
Solution: Keep up with new forms and reporting rules
Legislators are still trying to figure out how digital payments work. The last few years have seen a slew of new laws. Back in 2021, Congress lowered the reporting threshold for third-party settlement organizations (like Venmo), requiring a 1099-K form for any business that accepts more than $600 via digital payment methods.³ That law change has now been delayed indefinitely,⁴ but it’s worth keeping tabs on.
Stay on top of all the reporting laws regarding third-party settlement organizations. If that sounds too complicated, look into hiring a CPA. Failure to comply with the law can cost you, so do whatever you have to do to stay on the right side of the law.
Expect the legal landscape to change each year, and keep an eye on it. If you’re concerned about compliance, speak to a CPA.
Problem #2: Choosing the right features for your business
Customers are happy to use digital payments, but selecting the wrong features and plans complicates rather than simplifies your bookkeeping and accounting processes.
Solution: Choose plans and features made for businesses, not individuals
Make sure you’re using digital payment options correctly.
That means using Venmo Business or Cash App for Business, for example. Venmo requires you to use Venmo Business to accept business transactions. If you use your personal account, Venmo could reverse the transaction.
Choose a payment processor that supports digital wallet integration.
According to Pew Research Center, the use of Venmo and other digital payment apps vary by age and household income.² Digital wallet integration allows customers the option to pay how they want.
Offer customers the payment methods they prefer. Stay aware of new digital payment options and how to use them.
Problem #3: Tackling digital payments at scale
As your business grows and diversifies, transactions increase. Depending on your industry, many of your transactions are digital payments. The problem is that tracking and reporting get harder at scale, hurting rather than helping your business.
Solution: Reevaluate payment tools and invest in new features
Many digital payment methods offer transparency and real-time tracking capabilities. With the ability to send business information like invoice numbers along with a transaction, you can eliminate the need for manual updates and separate systems.
Upgraded payment tools alert your team to processing errors, dramatically lowering the likelihood of cash flow disruptions.
Fully explore and leverage every available feature and tool designed for business. Look for features in Paypal Business and Venmo that give you broad visibility over transactions, along with the specifics. This will set your business up for improved integration with your CPA for accurate forecasting, as well as correct Paypal and Venmo tax reporting.
Let’s get digital payment reporting squared away
I’m here to inform and empower business owners. Some problems can be dealt with in-house. But if you want to make absolutely sure that your digital payments are properly tracked and reported, we’re here to help.
Jeremy A. Johnson, CPA
- Global digital payment market size & share report, 2030 [Internet]. Grandviewresearch.com. Available from: https://www.grandviewresearch.com/industry-analysis/digital-payment-solutions-market
- Anderson M. Payment apps like Venmo and Cash App bring convenience – and security concerns – to some users. Pew Research Center. 2022. Available from: https://www.pewresearch.org/fact-tank/2022/09/08/payment-apps-like-venmo-and-cash-app-bring-convenience-and-security-concerns-to-some-users/
- H.R.1319 117th Congress (2021-2022) – American Rescue Plan Act of 2021. https://www.congress.gov/bill/117th-congress/house-bill/1319/text
- IRS announces delay for implementation of $600 reporting threshold for third-party payment platforms’ Forms 1099-K [Internet]. Irs.gov. Available from: https://www.irs.gov/newsroom/irs-announces-delay-for-implementation-of-600-reporting-threshold-for-third-party-payment-platforms-forms-1099-k