There are numerous reasons not to use payment apps for rent collection, and now the IRS is cracking down on them too.
Third-party payment apps like PayPal, Cash App, Zelle, and Venmo are convenient ways for tenants to pay rent. They’re fast, cost-efficient (using a personal account), and easy to use.
However, in an effort to mitigate tax evasion amongst small businesses, the IRS is cracking down on payment apps and has changed the related tax reporting rules. Previously, the IRS only required third-party payment networks to provide information on payments that met both of the following requirements:
However, these limits have been slashed, and as of January 2022, if you receive over $600 in yearly income on Venmo, Cash App, Zelle, or PayPal, you will need to declare income received via these systems on a 1099-K form. This is to make it harder for business owners and landlords to hide income collected through these apps.
Of course, having to pay tax on income collected through a cash app is nothing new. You should already be reporting all of your rental income whether it’s collected by paper check, bank transfer, or cash app. However, if you have been keeping back some of the income received in a digital wallet you will be required to pay more. Additionally accounts with regular larger transactions that are obviously being used for collecting payments for business purposes will be highlighted and will likely need to use a business account rather than a personal one.
As a side effect, business owners will also be unable to collect rent for free using a personal account on these third-party payment providers.
This new change is contained within the American Rescue Plan Act of 2021. In this Act, the reporting threshold for third-party settlement organizations has been slashed from $20,000 to just $600 in aggregate payments. It is estimated that this change will raise $8.4 billion over the next 10 years in additional tax revenue.
So what exactly happens for your rental business? Let us say that you own one or two rental properties and you use Venmo to collect your rent. From January 2022 Venmo will need to notify the IRS about the rental money that you receive. You will then receive a form 1099-K from the IRS with all your reportable payment transactions over $600 in a calendar year. With this additional information, Venmo will also now have more information and are likely to push you to use a business account.
This may sound a bit like a new tax but it’s actually just a change to the tax reporting that currently exists. Using these payment apps, there are still non-taxable incomes, such as:
Additionally, if you sell an item online for a loss you won’t have to declare that.
Collecting more than the $600 limit will indicate to the payment provider that you are in fact operating as a business.
Using a mobile payment app for business transactions may seem like an easy and cost-effective way to collect rent payments. However, many of them strictly prohibit the use of their services for business transactions unless you operate with a business account, and under these new laws, it will be increasingly obvious which accounts are processing business transactions.
Venmo states the following on their website: “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.”
Unfortunately, these business accounts often have high associated transaction fees. For example, the owner of a business profile using Venmo is charged a fee for every payment they receive that’s $1 or more. The seller transaction fee is a standard rate of 1.9%+$0.10 of the payment. This means if your rent is $1,000 per month you will be charged $19.10 per transaction, a total of $229.20 per year. And PayPal fees can be as much as 3.5%.
Breaking these rules and avoiding fees could see your account frozen and any money still in your digital wallet become inaccessible.
One of the significant flaws when using a payment app for rent collection is that the tenant determines how much and when to pay the rent. The landlord has no way to control or block payments. This means you are dependent on the tenant remembering each month to initiate the payment, and secondly that you can’t block partial payments.
Digital wallets have no payment protection, meaning a tenant accidentally sends the money to the wrong person which could delay that month’s payment until they are able to retrieve the funds.
More importantly, though, Venmo, PayPal, and Cash App can block payments, put them on hold, or freeze accounts. It could simply be because their system flagged it as suspicious. Neither you nor your tenant can then access those funds until the issue is resolved which could take weeks.
Finally, if a dispute arises, these apps generally favor the person who initiated the payment which could again delay or even halt a transaction.
Dedicated Rent collection apps have specific property management features which allow you to save time across your portfolio management.
When it comes to rent collection through purpose-built software there are a few key features that are advantageous over a peer to peer payment app including:
Ultimately, digital wallets and payment apps like PayPal, Zelle, Venmo, Cash App may seem like easy ways to collect rent, but they are not ideal for landlords.
Purpose-built rent collection software such as Landlord Studio. Landlord Studio allows users to easily collect rent online from their tenants. Tenants can log in at any time to view upcoming and historical payments as well as initiate new payments or set up recurring payments.
With quality property management software not only can you collect rent efficiently and securely with the features listed above but once the payment has been processed it is automatically tracked in the system against the corresponding property. Additionally, you have access to a full range of time-saving property management features, including rental listings, tenant screening, bank feed reconciliation, financial tracking, reporting, reminders, document storage, and more.
Keeping good records for your tax reporting is essential. And you want to choose an income collection and record-keeping system that works for you and is affordable. These new rules have made cash apps more expensive for businesses and landlords. Plus they were always less practical to use than purpose-built rent collection software like Landlord Studio. As such, now could well be a good time to explore your options.
As always, it’s a good idea to keep your finances for personal and business separately. If you have multiple properties, it’s suggested you set up multiple accounts and track those income expenses separately.