Does Zelle Report to the IRS? What Freelancers Should Know

Is there a Zelle tax loophole?

In short: Sort of. 

The new tax reporting rules about payment services don’t apply to Zelle. That’s because Zelle is different from other payment platforms (more on this in a minute).

But just because the IRS doesn’t require Zelle to send out 1099-Ks to its users doesn’t mean you don’t need to pay taxes on business income you received through Zelle. You still need to report all of your taxable income on your tax return — including business income you received through Zelle.

What is Form 1099-K?

The IRS has a series of 1099 forms used to report non-W-2 income. You might already be familiar with the 1099-NEC and 1099-MISC forms. 

Form 1099-K is issued to taxpayers by credit card companies and payment processors including PayPal, Cash App, and Venmo. These service providers are referred to as “Payment Settlement Entities” (PSEs).

The 1099-K reports these kinds of payments:

• Payment apps (such as Stripe, PayPal, Venmo, CashApp)
• Credit cards (such as Discover, MasterCard, American Express, or Visa)
• Debit cards
• Stored value cards (such as gift cards)
• Work and sales platforms (such as Fiverr or Poshmark)

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How have the 1099-K rules changed?

Though Form 1099-K has been around for a while, it started getting a lot of attention recently because of recent IRS changes. The longstanding rule has been that you’d only get a 1099-K if you earned over $20,000 from credit cards and payment apps and had more than 200 payment transactions. 

But in 2022, the IRS said the rules were changing. The new rule, which was supposed to affect tax year 2022 and beyond, made two key changes. You’d receive a 1099-K if the following was true:

• You were paid more than $600 through credit cards or payment apps
• You had any number of digital transactions

But then the IRS backtracked, delaying this rule change at the very last minute. Then, it was supposed to take effect in 2023, but the IRS delayed that too. So for the 2023 tax year, the $20,000 over 200 transactions rule is still in effect. (A lot of changes, we know.)

For the 2024 tax year, the threshold is set to change to $5,000. This is intended as a "phase-in" to the eventual $600 threshold, which the IRS still plans to implement at some point.

Frankly, the 1099-K tax rule changes are confusing. To make the process as simple as possible, consider using a tax filing app like Keeper. Our software helps you through the process, empowering you to understand your taxes.

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Does Zelle send out 1099-Ks?

No. Unlike other payment platforms, Zelle says it doesn’t send out 1099-Ks. 

How is Zelle different from other payment platforms?

Zelle is different from other apps you might use to send or receive money, like Venmo or PayPal. Zelle is run by Early Warning Services, a financial technology company owned by a network of large banks that use it to send your money to someone else’s account directly. 

Unlike Venmo or PayPal, Zelle never keeps your money in a Zelle account. It’s a direct transfer service to get your money from your bank account into someone else’s. And in this case, that makes a difference: Zelle isn’t subject to the 1099-K requirement that other apps and platforms are.

Do you have to pay taxes on Zelle payments?

Even though you won’t receive a 1099-K form for your Zelle payments, you do need to report your taxable income received through Zelle. The company confirms this on their website. “If payments you receive on the Zelle Network are taxable, it is your responsibility to report them to the IRS,” it says.

Think of it like getting paid in cash for work you did. It’s probably harder for the IRS to learn about those payments, but if the IRS conducts an audit and finds that you deliberately concealed taxable income, you could face repercussions, including penalties.

How do you report income you received on Zelle?

Reporting income you received on Zelle is pretty easy. You’ll just need to include it when you fill out your Schedule C, which is where you report your income and business expenses.

You’ll report your “gross receipts” on Line 1 of the form. The number you write here should include all the self-employment income you received for the tax year, whether or not you got a 1099 form for it. For example, if you received $21,000 from one freelance client who sent you a 1099-K and $1,000 from a second freelance client who paid you through Zelle, you’d record a total of $22,000 on Line 1.

Keep in mind that you’ll fill out a separate Schedule C for each type of freelance work you do. For example, a tutoring business and a woodworking business would need to be reported on separate Schedule C forms, even if you received payment for both using the same Zelle account.

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Should you switch to Zelle?

It depends. Like any other payment platform, Zelle has pros and cons. 

One benefit of using Zelle is that it doesn’t charge you fees for sending and receiving money, and it also doesn’t charge for instant transfers, unlike other apps. The fact that it’s owned by large banks may make you more comfortable if you aren’t used to digital payments. And since Zelle doesn’t need to send tax forms, it doesn’t have to do backup withholding for users who don’t provide tax information. This same requirement can lead other platforms to hold onto a percentage of your payments until you confirm your identity.

But Zelle comes with its drawbacks too. If you use a bank that isn’t affiliated with Zelle, you won’t be able to use its services. And it’s less popular than services like PayPal or Venmo, so there may be less of a guarantee you can use it with friends, family or clients. Zelle also doesn’t support using credit cards in payments.

If you’re considering switching to Zelle to avoid having to report your income on your tax return, you may want to reconsider. You are required to pay taxes on eligible income, regardless of whether you get a 1099-K form.

Zelle is one of many apps that’s useful for directly transferring money from one user’s bank account to another. But unlike other apps, the IRS doesn’t require Zelle to send you a 1099-K form to report your taxable income because of how Zelle is structured.

Regardless of whether you receive a 1099-K form for your taxes, you’ll still need to report all your self-employment income to the IRS. Luckily, the Keeper app can help you keep track of your business income and expenses, so you can save as much as possible come tax time.