What The IRS' New $600 Payment App Tax Means for Landlords

Note: As of December 23, 2022, the IRS has delayed the requirement for reporting third party network transactions exceeding in aggregate of $600 during the calendar year. Stay tuned for more news and updates regarding this legislation, and in the meantime please read the official IRS statement on this matter.

Payment apps are all the rage these days thanks to their ease of use and convenience. Venmo, Zelle, Cash App, and PayPal are among the most popular apps, and some landlords use them to collect rent — but what do you know about their tax reporting tools?

If you haven’t thought much about the tax implications of using payment apps, now is the time to start. The IRS has begun cracking down on "third-party settlement organizations" (aka, payment apps like Venmo and PayPal) in a big way.

So what does this mean for rental property owners?

If you use payment apps to collect rent, you might find yourself in the IRS' crosshairs.

This article will highlight where payment apps' weaknesses lie regarding taxes. We'll also share ways to protect yourself from an audit and list alternative rent collection tools that offer the same convenience as payment apps and will keep the IRS and your accountant happy.

Let's get started!

How the IRS is Coming After Payment App Users

Before we get into payment apps, audits, and alternatives, we'll quickly explain how the IRS is going after apps like Venmo, Paypal, and Zelle.

The controversy surrounds a tax form called the 1099-K.

What is Tax form 1099-K?

Before 2022, only payment app users who did more than $20,000 or 200 transactions in a given year would receive a 1099-K. This is rare for a small business, as most transactions typically go through credit cards, ACH, or other means.

In 2022, Congress amended the tax rules so that payment app users who do more than just $600 in transactions will now receive a 1099-K.

Understandably, this change is a big deal for self-employed business owners.

Independent landlords, freelancers, artisans, food truck owners — goods and services providers all over the country will now be required to report even a small amount of taxable income to the IRS.

This next section will highlight two of the most popular payment apps, Venmo and Zelle, and where they're lacking in the tax reporting department.

Zelle Taxes: Sink or Swim, They Don’t Care Either Way

Zelle is a true peer-to-peer payment app: funds transfer directly from one checking account to another. Venmo and PayPal, on the other hand, require accounts and act as a "middleman" between users.

Because of this peer-to-peer functionality, Zelle has no obligation to report your transactions to the IRS because they aren't technically a "third-party settlement organization."

Don't get too excited, though — Zelle doesn't report your income, but that doesn't mean the IRS won't come looking for it. Rent payments are taxable income, and when collected through a payment app, they still need to be reported in a 1099-K.

Landlords using Zelle to collect rent will need to find, fill out, and submit a 1099-K and any other necessary tax forms without Zelle's help.

To make matters worse, Zelle has no built-in functionality to see your transaction history, or to tag certain transactions like rent payments. If you want to see how much money you sent or received through the app, you'll have to request a statement from your bank and sift through it manually.

Here's a quick recap:

Zelle is "hands-off" when it comes to your taxes, for better or worse
They will not report transactions to the IRS
They will not issue you a 1099-K
They have no way to track or organize your transactions in-app

Venmo Taxes: They'll Help, But You'll Pay for It

Venmo does a slightly better job at trying to help landlords and other small business owners report their taxable income. But there are still several things that could be improved regarding tax reporting and business functionality in general.

To start with, Venmo has restrictions that discourage users from making business transactions with each other unless they have a verified business account.

Venmo Personal vs. Business Profiles

Here's a quote from Venmo explaining how they oversee and restrict transactions between personal profiles:

"Venmo may NOT otherwise be used to receive business, commercial or merchant transactions, meaning you CANNOT use Venmo to accept payment from (or send payment to) another user for a good or service, unless explicitly authorized by Venmo." (Source: Venmo FAQ page)

In a nutshell: a landlord using a personal Venmo profile to collect rent payments violates Venmo's User Agreement, and the company can review and deny any payments they find.

Venmo's "Business profile" can help you get around some issues by automatically tagging every payment you receive as "goods and services." But business profiles are only available to some and come with additional fees.

To date, a Venmo business profile will charge 1.9% + $.10 per transaction. (Source: Venmo Business Profile article.)

Does a Venmo Business Profile Save the Day?

If approved for a Business Profile, you can start accepting tenant payments. Venmo will categorize that rental income and provide you with a 1099-K.

So, if you're willing to jump through a few hoops, Venmo is pretty good at tracking money that comes in.

But what about the money that goes out for expenses? That's a different story.

Venmo doesn't categorize expenses very well, and there are limits to how much you can send out in payments (if Venmo doesn't decline them outright.)

Plus, if you wanted to connect to accounting software like Quickbooks — you're out of luck.

Venmo doesn't play nice with integrations, so there’s no way to connect your account with whatever software you use to track expenses, catalog receipts, or manage customer information.

Here is a quick recap of Venmo and taxes:

Venmo will report business transactions to the IRS
They will issue a 1099-K, but only if you have a Business profile
You must submit paperwork and be approved for a Business profile
Venmo doesn't integrate with bookkeeping software (i.e., Quickbooks)

Conclusion: Payment Apps Aren't Built for Business

Venmo, Paypal, Zelle, Cash App — all of these apps are designed for convenient peer-to-peer money exchanges between individuals.

The problem with the convenience of payment apps is how quickly they can muddy the financial waters if you're self-employed or have a part-time side gig.

You might use your Venmo app to send $100 to your nephew for his birthday and then turn around and collect a $100 pet deposit from a new tenant. Unless you're meticulous about noting every transaction and keeping separate personal and business bank accounts, you're likely to miss something — or worse, risk commingling funds.

The ability to accurately track and report ALL of the transactions in your business is out of reach from most payment apps. These limitations expose rental property owners to increased tax liability and even a tax audit.

It sounds bleak, but we’ll share a few ways to protect yourself from a costly tax reporting slip-up.

How To Protect Yourself From A Tax Audit

Here are a few things you can do to protect yourself from a possible tax audit. The first two are simple best practices, but the last tip is explicitly geared toward landlords.

Keep track of all incoming/outgoing transactions in Excel/Google or accounting software
Hire a tax professional
Ditch the payment apps and get better software

1. Keep Track of Everything Manually

Zelle doesn’t track anything and Venmo isn't much better, so how do you keep your income and expenses tidy?

If you guessed: painstakingly enter every variable into an Excel/Google sheet or manually add each transaction to your accounting software — you guessed right!

Filling up a tracking sheet with every dollar that moves through your account isn't fun, but it's your best hedge against missing the mark with your tax reporting.

If you’re going to go this route, I recommend Google Sheets — it costs nothing to sign up for, comes with several bookkeeping templates, and plays well with everything else in the Google Suite (e.g., Gmail, Google Docs, Google Drive, etc.)

2. Hire a Tax Pro

You can hire a tax professional like a CPA to help insulate yourself from an audit. These folks know the tax code intimately and will be able to guide your tax reporting efforts moving forward.

You'll know you've found a good one when they aren't shy to point out everything you've done wrong and tell (not ask) you what you need to do to fix it.

Don't be surprised if they ask you to do this next tip.

3. Ditch Payment Apps Altogether

That's right — we saved the simplest and best solution for last.

Instead of trying to "duct-tape" your payment app together with an Excel sheet, a handful of bank statements, and a tax pro, you should probably find an all-in-one platform for rental property finances.

"B-But I don't have time to learn a new piece of tech. I have enough to do as it is!"

That's a valid argument, but not all software is created equal.

Look for a rental property management app that will have features to help keep your finances organized such as:

Online rent collection
A tenant ledger showing what’s been paid, and what’s still owed
A system for tagging and organizing income and expenses separately
Tax document preparation on auto-pilot (yes, including the 1099K)

For example, Azibo's platform was built from the ground up with the "everyday" property owner in mind. It comes out of the box with built-in tutorials to help soften the learning curve and includes automation that reduces the number of steps you’d normally take to complete a task.

Anyone can learn to use the platform regardless of how tech-savvy they are.

With tools for rent collection, tenant applications and screening, financial management, and even landlord insurance, Azibo includes everything you like about payment apps, but with added features that make owning and operating a rental portfolio easier and (dare I say, tidier?)

Landlords: Beware the Tax Risks of Payment Apps

Payment apps have highlighted the shift from physical money to lightning-fast digital transactions. When was the last time you went to the bank to make a cash deposit?

However, the convenience of these apps has become a crutch for rental property owners — an unsteady crutch that could have dire consequences come tax season.

Most large investment companies won't have to worry about payment apps or the tax implications of using them for collections. Large companies use advanced (and expensive) property management systems and employ teams of tax professionals to insulate themselves from any tax mishaps.

But what options do independent landlords have?

You have us!

At Azibo, we build our platform around the needs of every rental property owner whether they have one or 1,000 properties. To that end, we've made our platform for rental property finances free!

Learn more about Azibo

Cody Rudolph is a real estate investor and digital marketing expert who writes about real estate investing, marketing, finances, software, and more at CodyRudolph.com.

Disclaimer: The information provided in this post does not, and is not intended to, constitute tax advice; instead, all information, content, and materials are for general informational purposes only. This content may not constitute the most up-to-date tax information. No reader, user, or browser of this article should act or refrain from acting on the basis of information herein without first seeking the advice of a tax professional.