2021 Update (first published in 2019)
The popularity of Venmo has continued to grow since we first published this blog.
Many are still left contemplating the same question – how will the IRS treat my Venmo payments to and from your business?
As of July 20, 2021, Venmo said they will be closely monitoring what appear to be business transactions to personal accounts.
Venmo issued a statement that they’ll started cracking down on “users who receive payments that are identified by senders as for goods and services will be charged a seller transaction fee of 1.9% + $0.10”.
Venmo has continued to push the advertising of their “Venmo for Business” Account in an effort to attract small-business owners.
What is Venmo?
Venmo is a mobile payment app that allows you to send money from your phone directly to recipients. The app, owned by PayPal, is essentially your digital wallet where you can link bank accounts, debit, and credit cards. From there, you can seamlessly transfer and receive money effortlessly at your fingertips.
Users create an ID and can easily find friends and family on the app by phone number or email address.
Don’t have cash on you to make a purchase? Just use Venmo and the payment will process in 1-3 business days with no transaction fee. No more running to the ATM. It’s fast, convenient, and the payment method of choice for Millennials and Gen Z.
How does Venmo track my payments?
Venmo only tracks payments through a tab on the app. It does not specify what exactly the transaction or monies sent was for. It will only include what you type in the text box before sending or receiving the transaction.
Since its early days in 2009, Venmo has now added a monthly email with a Venmo statement, but don’t expect it to be as detailed as a credit card or account statement from your bank.
Using Venmo is just like using cash, and therefore is considered an “unsubstantiated transaction” in the eyes of the IRS.
The IRS treats Venmo business payments to and from your business just like transactions that go through the bank.
If you engage in several transactions per day, month or year on a personal account, expect to be flagged by Venmo’s parent company, PayPal. You will have to prove that your account is being used on a “peer to peer” basis and not for business, which can become problematic.
The consequence could result in all transaction activity being subject to hefty merchant processing fees and reported to the IRS.
We are hearing that more and more accounts are being flagged each day as Venmo’s popularity continues to grow
This means that you must account for this income and are responsible for reporting it to the IRS.
Payment-to-Payment platforms are required to report gross payments for those who’ve received:
– Over 20K in payments
– Over 200 payments in a calendar year
If you meet those thresholds, the IRS will send you Form 1099-K during tax season.
If you are below these thresholds, you still have to report this income using Form 1099-NEC (non-employee compensation).
Keep detailed track of all business expenses when using Venmo, such as the amount paid, description, receipts, invoices, etc.
Venmo & Businesses:
Venmo interacts with businesses in a few ways.
First, you may notice that some large corporations like GrubHub, Lululemon, and Uber give you the option to pay on their website or through their apps via Venmo.
Second, Venmo now has a “business” account option available on their website, claiming to track purchases and give businesses a platform for their entity that stretches “far beyond the moment of purchase”.
Third, Venmo even offers their own Mastercard where the company says you’ll earn rewards and track purchases even more closely.
So, can I use Venmo for my business?
From our business to yours, these offers on the Venmo site are not a green light to start using Venmo for your business. We recommend that you do not use Venmo for business transactions and you should not use it to directly accept payments. There are several other ways to accept and exchange payment for services that are “cleaner” in terms of record keeping.
Venmo’s site itself is very vague and misleading when it comes to what businesses it considers to be eligible for accepting Venmo payments. The usage of Venmo payments to merchants are available for only “certain business models” according to its site. These certain business models seem to be large S&P and NASDAQ companies as mentioned above. Clearly no intention for use of small businesses.
Venmo goes on to say the usage of the app is not supported by the following:
– Selling goods or services in person
– Receiving payment for goods/services through Venmo App
– Facilitating peer-to-peer transactions between two Venmo users
As we mentioned above, Venmo’s tracking systems is not efficient and does not integrate with QuickBooks Online. Venmo and PayPal Friends & Family are primarily to be used for personal, not professional exchanges.
Furthermore, vendors receiving payment through Venmo for goods or services must also be aware of sales and use tax laws in each particular state. Using Venmo does not give you a free pass!
What about the Venmo Business Account? If I setup a business account, am I good to use Venmo for my Business?
We still do not think Venmo’s Business Account is the best option. Why?
When it comes to security and privacy, we do not believe Venmo is the best.
First, transactions are not private unless you remember to set them to private.
Second, Venmo is known for freezing accounts on both volume and suspicion. Have 10 to 20 transactions a day? Venmo could see that as a reason to freeze your account.
Third, let’s say you do have an urgent issue. Venmo’s Customer Services is not the best.
On Venmo’s site and the app, there’s only an option to chat or email for assistance, no phone number. When it comes to your business, you want to feel secure that in case of an emergency, you can get in contact with a representative who can expedite the issue.
You don’t want to be left waiting with no answers.
Venmo Balance Not FDIC Insured
If Venmo were to dissolve, your Venmo balance is not insured. That’s why you’ve probably seen many articles and headlines urging you to transfer your Venmo balance as soon as you get it to your bank account, instead of leaving it there.
Venmo’s site does say that “funds added using a Bancorp account and routing number, are transferred to and held by Wells Fargo Bank, N.A. where they are eligible for FDIC pass-through insurance”.
This means that because you are using Venmo to transfer money at an FDIC Insured Institution, the only “pass through” or transfer of funds is insured.
What about paying people who work for me using Venmo?
In addition to using Venmo to receive funds, small business owners may want to start using Venmo to also pay others. But, be careful doing so.
We do not recommend going this route, however have seen some small businesses opt for Venmo and Zelle due to the convenience factor.
You should not pay employees on your payroll using Venmo.
Again, Venmo’s system of how it tracks transactions is not reliable. Use payroll companies, such as ADP or Paychex. They do a great job at an extremely affordable cost.
You do not want to assume the responsibility for making payroll tax deposits on a weekly or monthly basis. It can get tedious and is often where business owners run into tax trouble.
If you are using this as a vehicle to reimburse employees for business-related expenses, each expense should be documented through an expense report.
You can go the old-fashioned pen and paper expense chart, or use mobile cloud applications, like Expensify or Divvy for day-to-day expenses or SAP Concur are travel intensive.
It’s important to do it the right way!
What is the proper procedure for business owners who pay individuals via Venmo?
If you decide to start paying individuals via Venmo, you must send them a 1099-NEC form to those you pay over $600 in a calendar year.
This is because this income is considered taxable and must be reported to the IRS.
Venmo will NOT send you a 1099-K form. Its parent company, PayPal, may if you have cash receipts totaling over $20,000.
Paying freelance or independent contractors through Venmo is okay, as long as you issue Form 1099-NEC at the end of the year.
It’s important to have the 1099 recipient or your “independent contractor” complete Form W-9 before issuing their first Venmo payment exchange.
Report this information in Box 1: Nonemployee Compensation, which is subject to self-employment taxes.
This is because this income is considered taxable and must be reported to the IRS. Again, Venmo will NOT send you a 1099-K form, as its parent company, PayPal, might send you one if you have exchanged transaction activity receipts totaling over $20,000.
Without good recordkeeping, your payments made to contractors by Venmo may be disallowed in the event of an IRS audit.
We understand Venmo is easy, convenient, and a fast way to get paid for your goods and services. However, as stated on the company’s website, it is not recommended for business, commercial, or merchant transactions. We believe the business goals of Venmo do not fully support or protect your business in the best way possible. If you have questions about what the better options are for you and your business, give us a call or send us an e-mail today.
Chris Boyer, EA
Christopher Boyer is an Accountant, Bookkeeper, Enrolled Agent & QuickBooks Pro Advisor. Chris provides a wide array of business consulting services, taxes and IRS representation for business owners, individuals, families, corporations, trusts, and estates.