Tax Pitfalls of Venmo, PayPal, and CashApp: What the IRS Wants You to Know in 2025
If you use Venmo, PayPal, or CashApp to accept payments for freelance work, side gigs, or online sales, you’ll want to pay close attention to this year’s tax changes. New tax rules are making it harder to fly under the radar, even if you only earn a few thousand dollars on the side. Here’s what you need to know to stay compliant and avoid costly surprises next year.
Why the IRS Changed the Rules
In recent years, the rise of freelance and gig work and online selling has presented challenges for the IRS in tracking taxable income. To close this gap and improve transparency, the IRS lowered the reporting threshold for third-party payment platforms.
Previously, platforms like PayPal only had to issue Form 1099-K if you earned over $20,000 and had more than 200 transactions in a calendar year. Originally, the IRS planned a $600 threshold in total payments for goods or services to trigger the reporting requirement, but revisions to the new rules now include a phase-in period as follows:
- 2024: If you received $5,000 or more in business-related payments, payment platforms automatically sent a 1099-K.
- 2025: You will only need to earn $2,500 to receive a 1099-K.
- 2026: The originally planned $600 in total payments—regardless of the number of transactions— will take effect.
This change is part of a broader effort to ensure platforms and users have time to adjust, but by 2026, even small side gigs could trigger a tax form.
What Types of Payments Are Taxable?
The IRS is not interested in your birthday gifts or splitting brunch with friends. However, earned income for goods or services paid through PayPal, Venmo, or CashApp is taxable and must be reported. Examples include:
- Freelance services or contract work
- Tutoring
- Online product sales
- Crafts or handmade items
- Side jobs like dog walking or delivery driving
Not taxable:
- Personal gifts
- Reimbursements (e.g., a friend paying you back for concert tickets)
- Payments for shared expenses
To help avoid confusion, label your transactions clearly within the app whenever possible.
Who Needs to Pay Attention
This change affects more people than you might expect. If you:
- Earn just a few thousand dollars freelancing
- Resell items online as a hobby or side hustle
- Pick up occasional gigs on platforms like TaskRabbit or Fiverr
…you could now receive a 1099-K and be expected to report that income.
Keep Business and Personal Transactions Separate
One of the best ways to stay organized and avoid a potential IRS headache is to use separate payment apps or accounts for personal and business use. For example, use one Venmo account for freelance payments and another for splitting rent or reimbursing friends. Mixing business and personal transactions can lead to confusion and inaccurate tax reporting.
What to Know About Form 1099-K
If you receive a 1099-K, it shows the gross amount you were paid—not your actual income after expenses. That means it doesn’t subtract your platform fees, it doesn’t account for refunds or chargebacks, and it doesn’t reflect your net profit. To report your income accurately, you must keep records of how much you actually earned, what you spent on business-related costs, and any fees charged by the platform. Use spreadsheets or accounting software to track income and expenses throughout the year, and save receipts for anything you plan to deduct.
What to Do If You Receive a 1099-K
If you get a 1099-K in January 2026, here’s what to do:
- Compare the reported amount to your own records. Make sure it only reflects business transactions.
- Report the income on your tax return. Use Schedule C if you’re a sole proprietor or freelancer.
- Deduct legitimate expenses. These may include supplies, platform fees, mileage, or home office costs.
- Work with a tax professional if you’re unsure how to handle it, especially if it’s your first time dealing with this form.
The bottom line is that the IRS is cracking down on unreported income in the gig economy. If you earn money through PayPal, Venmo, or CashApp, take steps now to organize personal and business transactions, keep detailed records, and prepare for tax time.