The IRS Is Coming for Your Venmo Income

Small-business owners, prepare yourselves for the era of the 1099-K. That’s the tax form for disclosing transactions with services such as PayPal, Venmo, and Airbnb. Until this year, anyone with less than $20,000 in total payments typically didn’t get a 1099-K—and thus, in theory, could avoid paying taxes on money earned on such platforms. But since Jan. 1 those companies have been required to report gross payments of more than $600 directly to the Internal Revenue Service. That means small-business owners—as well as people who periodically empty their closets on EBay—will receive a 1099-K from any service provider where their income exceeds that amount.

Lexi, who asked that her last name not be disclosed because she fears an IRS audit, spends her weekends trolling flea markets, estate sales, and storage unit auctions for hidden treasures such as vintage sunglasses and Nintendo Game Boys. Since 2013 she’s sold those items as well as her old clothes and housewares on EBay, Facebook Marketplace, and Depop, earning as much as $15,000 a year. And because those companies didn’t say anything to the IRS, well … she didn’t, either. But under the new regulations, if she raids her closet for a vintage dress to sell for $45, that $45 will be considered taxable income unless she can provide the original receipt proving she’s selling it at a loss. "I’m just constantly cleaning out my house," she says. "The new rule means I’ll have to track everything."

Because many users don’t separate personal transactions from business revenue on Venmo and other platforms—and the services don’t always make it easy—entrepreneurs say the rule change will create an administrative headache. Marvette Critney, a real estate broker in Decatur, Ga., uses PayPal and Stripe to receive money for referrals from websites, for income from coaching and consulting, and for paying back small amounts owed to friends. "The biggest impact is having to decipher which payments are income," Critney says.

One way to reduce the confusion would be to open a second account for commercial activities or to separate payments by platform—for instance, restricting Venmo to personal use and PayPal to business. But that’s not always practical, because not all customers will have an account with your preferred app, says Rob Stephens, founder of small-business consulting firm CFO Perspective. And even though he closely tracks changes in tax law, he was recently flummoxed when paying a writer for help with a blog. "Suddenly there’s this ‘turn on for purchases’ check mark option in Venmo," Stephens says. "What does that mean?" The writer, who’s an accountant, responded that she thought the button applied to goods, not services, but Stephens had already clicked. "I may have done it wrong," he says. "I’m still fuzzy."

Tech companies are coming out in force against the rule, aghast at the prospect of collecting tax ID numbers for millions of clients and serving as enforcers against noncompliant customers. EBay Inc., Etsy Inc., and five other players have created what they call the Coalition for 1099-K Fairness to combat the new rules, saying they want to protect "casual online sellers and microbusinesses from unfair tax and privacy burdens." If the rule remains in place, Stephens suggests entrepreneurs acquire an employer identification number to avoid having to disclose their Social Security number to every new platform they use.

William DeJesus, co-founder of accounting firm TaxTerminal.com, says one benefit of the shift is that it will allow small companies to offload responsibility for issuing 1099s to the payment platforms. "But everyone needs to be educated about that," he says. Other proponents say it levels the playing field online. Until this year a larger merchant on EBay might sell a used laptop for $800, expecting to pay $150 in taxes. But a smaller rival could price the same device at $650 and simply not report the income.

Still, even some big vendors say the shift is mostly going to make life difficult for tiny independents—without doing much to raise tax revenue. "This rule is clearly going after easy targets," says John Frigo, e-commerce manager at Best Price Nutrition, an international seller of bodybuilding supplements. "Neither billionaires nor millionaires are cheating on taxes $600 at a time."