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Zelle Taxes: Why This Payment App Is Different

Zelle is not subject to the same reporting requirements as competitors such as Venmo.
Andy Rosen
By Andy Rosen 
Updated
Edited by Pamela de la Fuente Reviewed by Michael Randall

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If you’re a user of online payment apps such as Venmo, you might have heard about measures the IRS was taking to track income delivered through these services.

The agency had planned to require competing services to use Form 1099-K to report business income exceeding $600 starting with the 2023 tax year. But in November 2023, the agency said it would delay that requirement.

Either way, Zelle said its users wouldn't have been affected. 

Because Zelle is controlled by a consortium of banks that use it to send client funds directly to one another, the payment network never has custody of your money. That turns out to be a key distinction for income tax reporting purposes.

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Whatever service you use, you likely won’t have to deal with tax reporting on personal payments. Splitting a bar tab isn’t going to trigger a 1099-K. But if you have a business account or are receiving payments for $20,000 worth of goods or services, you may get one of these reports. And don’t forget, you’re supposed to report taxable income to the IRS whether or not you get a tax form.

Does Zelle report to the IRS?

If you have more than 200 transactions or $20,000 in taxable income on another service in 2023, the IRS will be able to find out about it through a Form 1099-K sent by that platform. For tax year 2024, the threshold falls to $5,000 in goods and service payments. On Zelle, there’s no such reporting requirement.

Is there a Zelle tax loophole? 

Sort of. It’s true that tax reporting rules governing other payment services don’t apply to Zelle, but the actual rules about how income is taxed are the same regardless of how you receive the money. Remember: just because Zelle isn't required to send 1099-K forms, that doesn't mean you don’t have to pay taxes on your business income. You still must report all taxable income you made, including income from Zelle, on your tax return.

Zelle tax 2023 

If you have taxable income from Zelle, you will need to report it correctly. The law doesn’t allow you to avoid taxes just because you don’t get a tax form. 

Think of income from Zelle like a payment in cash. It might be harder for the IRS to find out about such payments. But if federal agents determine that you deliberately concealed taxable income — say through an audit that looks at other business records — you could be in line for serious legal headaches. 

“If payments you receive on the Zelle Network are taxable, it is your responsibility to report them to the IRS,” Zelle says on its website

.

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Why doesn’t Zelle send you a 1099?

Zelle says it doesn’t have to send 1099-K forms because of a difference in how it processes payments. 

Zelle is owned by Early Warning Services, a financial technology company owned by large banks including Bank of America, Truist, Capital One, JPMorgan Chase, PNC Bank, U.S. Bank and Wells Fargo.

Zelle is different from some competitors because it facilitates direct bank-to-bank transfers between customers. You can’t hold a balance directly on Zelle like you can on Venmo or PayPal. That difference translates to different reporting requirements

Long story short: Zelle’s setup, which uses direct bank-to-bank transactions, is not subject to the IRS’s 1099-K reporting rules. Other peer-to-peer payment apps are considered “third-party settlement organizations” and are bound by stricter tax rules

.

So, should you switch to Zelle? 

That depends on you and your needs. Zelle has its strengths, but you might also need some features Zelle doesn’t offer that are available from competitors such as Venmo, PayPal and Cash App.

For instance, some alternatives to Zelle offer the ability to buy investments such as stocks and crypto. If that’s something you’re looking for, you may want to shop around. Certain competitors also offer the ability to use credit cards in payments, which Zelle doesn’t support. 

Some of these other apps are also very widely used, so if your friend doesn’t have Zelle, you might have to download another app anyway to get your half of the pizza bill.

In Zelle’s favor is the absence of fees for sending and receiving money (though you should check with your bank to make sure it’s not charging you on its end). And the service’s close relationships with many banks may give comfort to people unfamiliar with digital payments. 

Finally, because Zelle isn’t required to send tax forms, it is also not required to do backup withholding for people who don’t supply tax information. This requirement can lead services such as Venmo to hang onto up to 24% of your payments until you confirm your identity.

Still, if you’re thinking about switching payment services just to avoid taxes, you may want to slow down. Again, if you have taxable income, you are supposed to pay taxes whether you get a form or not.

In fact, if you are keeping track of your taxable income, you might appreciate the tax form as a simple way to keep your records in one place.

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