Venmo and other online payment apps might have informed you about new IRS measures to track income received through these services. Zelle is the most widely-used app, and it doesn’t seem to be changing its tax reporting policies.
Zelle is managed by a group of banks who use it to send funds to clients directly. This means that the payment network does not have custody of your money. This distinction is crucial for income tax reporting purposes.
Zelle claims that the IRS will not require other services to use Form1099-K in order to report business income exceeding $600 beginning with the 2023 tax year.
No matter what service you use, tax reporting for personal payments is unlikely to be an issue. A 1099-K is not going to be issued if you split a bar tab. However, if you have a business account and receive payments for goods or service, you might get one of these reports. You must report your taxable income to IRS regardless of whether you receive a tax form.
Is there a tax loophole for Zelle?
It’s kind of. Although Zelle doesn’t have the tax reporting rules for other payment services, the tax rules that govern income tax are applicable regardless of how the money is received.
The IRS can obtain information about your taxable income from any service that exceeds $600 through a Form 1099K. This form is sent by the platform. There is no reporting requirement for Zelle.
Zelle tax 2022
Some mixed messages have been sent by the IRS about tax reporting in payment services for 2022. The threshold for reporting will drop from $20,000 down to $600 for apps that must send 1099-K forms. This change will take effect in this year and allow taxes to be filed by 2024.
Zelle is not affected by this, as she was not subject to the tax rules in 2022, and will not in 2023. You still have to pay taxes even though Zelle doesn’t need to submit 1099-K forms. All taxable income, including Zelle income, must be reported on your 2022 taxes.
Zelle will also be taxed by the government in 2023.
Yes, you must report any taxable income received from Zelle. You can’t avoid taxes because you didn’t receive a tax form.
Consider income from Zelle as a cash payment. The IRS might not be able to locate such payments. However, if federal agents find out that you have deliberately concealed income (e.g. through an audit that examines other business records), you could face serious legal headaches.
Zelle explains on its website that “if payments you receive from the Zelle Network become taxable, it’s your responsibility to report them back to the IRS.”
Why wouldn’t Zelle mail you a 1099?
Zelle claims it doesn’t need to send 1099K forms due to a difference in the way it processes payments.
Zelle is the property of Early Warning Services, a financial tech company that owns large banks like Bank of America, Truist and Capital One. PNC Bank and Wells Fargo are also owners.
Zelle offers direct bank-tobank transfers between customers, which is a distinct advantage over other competitors. Zelle doesn’t allow you to hold a balance on your account directly like PayPal or Venmo. This difference means that you will have different reporting requirements
The long story is that Zelle’s setup which involves bank-to-bank transactions does not fall under the IRS’s 1099K reporting rules. Peer-to-peer payment apps that use peer-to-peer technology are also considered “third party settlement organizations” and must adhere to stricter tax regulations.
Should you make the switch to Zelle?
It all depends on your needs and preferences. Zelle is a great tool, but there are certain features that Zelle does not offer. These features can be found at other competitors like Venmo, PayPal, Cash App.
Alternatives to Zelle, for instance, offer investors the opportunity to purchase stocks and crypto. You might want to look around if that is something you are looking for. Zelle does not support the use of credit cards for payments. However, there are other companies that offer this option.
These apps are very popular, so if you don’t know how to use Zelle, you may have to install another app to pay half the pizza bill.
Zelle favors the lack of fees for sending or receiving money. However, you should verify with your bank that it is not charging you. People who are not familiar with digital payments may find comfort in the service’s relationships with many banks.
Zelle is not required to send tax forms. It is therefore not required to withhold backup withholding from people who haven’t provided tax information. Venmo, for example, can hold on to up to 24% until you verify your identity.
However, you might want to slow down if you are considering switching payment services to avoid taxes. If you have taxable income you must pay taxes, regardless of whether you receive a form.
If you keep track of your taxable income you may find the tax form useful.