Venmo and other payment apps are becoming a popular way to pay contractors. We talked about the “1099-K exception” in the last post, where if you pay someone via a “third-party processor” you do NOT need to issue a 1099 yourself to that person because the payment processor will send a 1099-K to that person instead.
What about Venmo? Here are a few things you need to know when your business pays a contractor through Venmo.
ONE: Venmo is a Third-Party Processor
Venmo’s website says it IS a third-party processor: https://help.venmo.com/hc/en-us/articles/360044347033-Business-Profiles-Tax-FAQ
This means if you pay a contractor via Venmo, the 1099-K rules apply and you don’t need to send a 1099 yourself to the contractor. With one HUGE caveat as discussed next!
TWO: Only for Payments Made Via Venmo Business Profiles
Did you know: Venmo says businesses are not supposed to use Venmo unless the business has a business profile? When you pay a contractor, that is a business transaction. Now, I am being cynical here but I can say with almost 100% certainty that your contractor is taking payment via their personal profile rather than a business profile. Individual profile = no fees; business profile = fees similar to what a merchant processor would charge for credit card transactions.
Venmo is making it easier for contractor’s to take business payments. See this Wall Street Journal article, which talks about how, starting July 20th, a person can mark a payment as a business transaction from an individual account (with the fees taken out). In the past, a person needed to set up a separate profile for their business and toggle between personal and business.
The point here is: the prohibition on receiving business payments via an individual profile is really the contractor’s problem, not yours. Nothing bad is going to happen to you for paying a contractor via an individual profile. The problem could be on the contractor’s side, if Venmo ever questions their transactions.
THREE: What Does This Mean for 1099 Reporting?
If you pay a contractor via a contractor’s BUSINESS profile in Venmo (or presumably, starting July 20th, a personal profile with the transaction marked as a “business” transaction) you will NOT need to issue a 1099 yourself to the contractor. (Unknown: how do you know if you’re paying via a business profile or not?)
If you’re just paying via the contractor’s individual profile, you DO need to issue a 1099 yourself. The fact that such a payment violates Venmo’s terms of service is probably not your problem as the paying business (it’s the contractor’s problem). What you need to know is, this type of payment means you DO issue a 1099.
Bonus: Various Payment Methods
What if you pay a contractor using a variety of methods? Here’s an example:
You pay a contractor $6,000 during the first half of the year by writing a check to the contractor. The second half of the year, you pay another $6,000 but now you’re paying via a legitimate business profile on Venmo (or by using a credit or debit card, or through PayPal). You put $6,000 on a 1099-NEC for the payments made during the first half of the year, but you do NOT report the $6,000 made during the second half of the year because those payments fall under the 1099-K rules.