The IRS Is Clamping Down on Cash Apps—Could This Affect Your Rental Business?

In This Article

Do you use PayPal, Cash App, Zelle, or Venmo to collect rent? If so, new rules mean that you could owe taxes on digital transactions. Beginning in 2022, the Internal Revenue Service (IRS) will start checking digital wallet business transactions over $600. This new rule in the federal tax law is to clamp down on small businesses, self-employed people, or someone who has a side hustle and wants to avoid paying taxes.

So far, apps like Venmo, Zelle, and PayPal have only had to report over $20,000 in aggregate payments. Some landlords and other small businesses took advantage of this and started using cash apps to collect rent. Because the money never went to a bank account, keeping it under the IRS radar was easy. However, as of January 2022, all of that will change. If you receive over $600 in yearly income on Venmo, Cash App, Zelle, or PayPal, you will receive a Form 1099-K.

Of course, having to pay taxes on income through cash apps is nothing new. So, if you are already reporting all of your rental income—whether it’s by paper check, bank transfer, or cash app—the changes won’t affect you. But if you’ve been keeping back income received through a digital wallet, you will be paying more to the IRS from 2023.

What do the changes mean for your small business? What about using your personal Venmo account for accepting rent payments? Are there better alternatives to Venmo or PayPal for collecting rent? Let’s look at these issues.

Tax rule changes affecting cash apps

The new changes in how cash app business transactions are reported are contained in the American Rescue Plan Act of 2021. The reporting threshold for “third party settlement organization” was slashed from $20,000 to just $600 in aggregate payments. The most significant impact of this new rule is on self-employed workers, gig workers, and many people with a side hustle. It is estimated that the changes will raise over $8.4 billion over the next 10 years.

How could this new rule affect your small rental business? For example, say you own one or two rental properties to make some money on the side, and you use Venmo to collect rent. Starting in January 2022, Venmo will notify the IRS about the rental money you receive. Then you will receive a Form 1099-K from the IRS with all your reportable payment transactions over $600 in a calendar year.

Do the IRS tax changes affect personal payments?

When the changes were announced, people were worried they would be taxed on any cash they received in their digital wallets. However, this is not true. The taxes don’t apply to receiving money from family and friends as reimbursements or gifts.

If you receive over $600 in a calendar year, you will automatically receive a 1099-K form. However, if the money received was only for personal transactions and not business income, you won’t have to pay taxes on it.

Should you use a cash app to collect rent?

The changes in the use of cash apps for business payments raise an excellent question for landlords: Are digital wallets the best way to collect rent?

Digital wallets such as Venmo, Cash App, and Paypal make it easier to collect rent online. The cash apps are more secure and faster than accepting paper rent checks. But there are several downsides to using them for accepting rent payments.

Here are some reasons to avoid cash apps if you are a landlord.

1. They charge expensive fees for business transactions

Using mobile payment apps for a small business requires having a business account. Unfortunately, this means you incur fees for each transaction. For example, Venmo charges 1.9% plus $0.10 in fees, and PayPal fees can be as much as 3.5%.

What about using your personal Venmo or PayPal account to collect rent? Unfortunately, the policies of most cash apps prohibit accepting business transactions through a personal account.

For example, Venmo states the following: “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.”

Related: How Venmo fees affect landlords

2. Cash apps don’t allow payment control

A significant flaw when using a mobile payment app for rent collection is that you can’t block partial payments. Typically, money received appears instantly in your account. This means that there is no way to decline a payment.

The inability to block partial payments is a serious concern for landlords. For example, let’s say you are trying to evict a tenant for nonpayment of rent. Suppose you accept rental payments through a cash app, such as Venmo, PayPal, Cash App, or Zelle. In that case, the delinquent tenant can transfer as little as $1 as partial rent payment and stop the eviction process.

3. There is no purchase protection for landlords

Another concern if you are a small business owner is that digital wallets have no payment protection. For example, a tenant could mistakenly send the rental payment to the wrong person. If that happens, it’s up to the tenant to retrieve the cash. During this time, your cash flow suffers because you are missing a rent payment.

Additionally, Venmo, PayPal, and Cash App can block or put on hold certain transactions. In some cases, there is nothing the tenant can do until they resolve the issue. It could even be that a simple cash transfer gets flagged as suspicious, and you don’t receive the money for weeks.

4. Cash apps lack the features of rent collection apps

P2P (peer-to-peer) payment apps lack many of the features of dedicated rent collection apps. Here are several landlord-friendly features that many of the best apps for rent collection contain.

• Set up recurring payments to always collect rent on time.
• Accept rent by debit card, credit card, or ACH bank transfer.
• Send in-app reminders about rent payments or late payments.
• Block partial rent payments.
• Allow tenants to pay rent on a flexible schedule.
• Accept maintenance requests.
• Process digital rental applications.
• Collect security deposits.
• Report rental payments to credit bureaus to help boost a tenant’s credit score.
• Allow tenants in a multitenancy rental unit to split rent.

Digital wallets like PayPal, Venmo, Cash App, and Zelle seem like an easy way to collect online payments, but they are not ideal for landlords. Of course, changes to the IRS reporting requirements on mobile app transactions won’t affect legitimate, honest landlords. Still, there are plenty of reasons to switch to a rent collection app to streamline your rental business.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.