Zelle and Taxes: Will I Receive a 1099-K?

We’ve been warned about the new 1099-K reporting thresholds for over a year now. Beginning in tax year 2023, you will receive a 1099-K, Payment Card and Third-Party Network Transactions, if you receive more than $600 in aggregate payments through a payment app or online marketplace. These can include Venmo, PayPal, Etsy, eBay, Cash App, Square, Facebook, Amazon, Shopify, and many others. However, there is one payment app that is not included in these new policy changes: Zelle. In this article, we’ll give an overview of Zelle, including its features, why it is not required to abide by the new thresholds, and if it’s the right payment app for you. 

What are the new 1099-K reporting thresholds? 

As part of the American Rescue Plan of 2021, the IRS announced some new reporting thresholds for Form 1099-K. Prior to 2023, Form 1099-K, otherwise known as the Payment Card and Third-Party Network Transactions form, is automatically sent out by financial institutions if you earned an aggregate amount of $20,000 in over 200 transactions for goods and services. Beginning with tax year 2023, these thresholds have drastically shrunk. Now, all it takes is an excess of $600 in payments, whether it occurs over one transaction or several.

What is Zelle? 

Zelle is a digital payment network controlled by a group of banks, including Bank of America, Capital One, JPMorgan Chase, Wells Fargo, U.S. Bank, and a few others. It allows users to send funds directly to other users, even if they do not have the same bank and even if their bank does not offer Zelle. All you need is the recipient’s email address or phone number to safely send money. 

Why is Zelle exempt from the new 1099-K reporting thresholds? 

So, why is Zelle exempt from this? The answer to this lies in the method they use to transfer funds. With apps like Venmo, PayPal or Etsy, you receive funds in exchange for goods and services, and then those funds are held in the app until you transfer the funds to your bank account. Zelle, on the other hand, does not hold funds. Instead, they do direct bank transfers between users and these transactions are not subject to the IRS’s 1099-K reporting requirements.  

Can I switch to Zelle to avoid receiving a 1099-K? 

Remember, just because you don’t receive a 1099-K for income earned, does not mean you are exempt from reporting your income to the IRS or paying taxes on it. The last thing you want is an IRS audit or worse: the IRS pursuing criminal charges for deliberate concealment of taxable income.  

Tax Help for Those Who Use Zelle and Other Third-Party Payment Apps 

Although we haven’t technically experienced the new change, it is already in effect. If you receive payments through third-party payment apps other than Zelle, you should expect to receive a 1099-K in early 2024 if you earned within the reporting threshold. If you currently collect payments for your small business through Zelle, you will not receive a 1099-K. But beware that this does not mean you are off the hook when it comes to paying taxes. It means you have the additional responsibility of calculating the income earned through Zelle and reporting this income to the IRS during tax time. Optima Tax Relief is the nation’s leading tax resolution firm. 

If You Need Tax Help, Contact Us Today for a Free Consultation 

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