Over the past year, it is becoming more common for small businesses to no longer accept 3rd party payment options like Venmo, Cash App, and PayPal; however, a lot are still accepting Zelle. The reasoning for this is that just like when paying cash, you don’t need to show the IRS those payments. This came to light on Jan. 1 of this year when the IRS announced it now requires 3rd party payment processors (Like Venmo, PayPal, etc.) to Issue 1099-K forms to any users who receive more than $600 in payments from their apps. Previously, these apps only issued 1099-K forms if their gross payments exceeded $20,000 and had 200 or more transactions.
How is Zelle any different?
You may be thinking, how does Zelle not fall under the same category? Well, the private financial services company says that the new rule doesn’t apply to them. Considering that they are simply a bank-to-bank processing service and don’t hold any funds. Venmo, PayPal, and Cash App all require you to have money transferred and held in their respective accounts, and then from there, you choose when to transfer it directly into your bank account.
A Zelle spokeswoman said in an email that their payments “are not subject to this law” and many small businesses are turning to Zelle “because it makes it easier to complete digital payments where they bank, enabling easier bookkeeping and accounting by having the SMBs’ data at one source,” she added. These small businesses see a greater benefit in having the money go directly into their bank accounts, rather than being held by a third party.
Proceed With Caution
Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, suggests exercising a lot of caution as a small business looking to switch over to Zelle for payments. “It’s a dangerous game for tax cheats to migrate to Zelle,” he says. “It wouldn’t be hard for the IRS to unravel that.” There are 2 scenarios that Rosenthal outlines, one is Congress could very easily extend the law the include Zelle, or the IRS could investigate and seek out customers names directly from Zelle for “heightened auditing scrutiny.”
Wrap Up
As of now, it seems as though small businesses are successfully using this loophole to avoid certain taxes on receiving payment. However, it is not to say this won’t change in the near future as this method gains more traction and the IRS starts to notice. Additionally, it is important to remember that accountants are obligated to follow the tax code, assisting clients in avoiding tax payments (which is legal) as opposed to evading them (which is illegal). You should speak to a trusted financial advisor when making any decisions about your small business.