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Should I Use Venmo and Cash App to Pay Employees?

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December 30, 2020

 

Using free apps like Venmo, the Cash App, Zelle or others is not the best way to pay contractors for their services they are providing your small business. Some of those apps actually state on their websites that they are not meant for business transactions and they highly encourage you against it. In this blog, I’m going to tell you why it’s not the best idea to use those apps but also provide you with a low-cost, easy-to-use alternative. 

A few weeks ago, I released a video where I talked about why you should stop accepting payments from clients using Venmo, friends and family Paypal, etc., and today I want to talk about why you also shouldn’t be paying your contractors using these apps.

If you haven’t heard of these apps, they are all similar in the way that you can easily transfer money from one person to another and trust me, I get it. I love to use Venmo or the Cash App occasionally when I need to reimburse them for my portion of dinner, a gift that was purchased, or something similar. With a few little clicks on your phone, you can have money out of your bank account and into someone else’s within minutes. That sounds great when it comes time to pay a contractor that did some work for you, right? Well, sure but what you might not be thinking about are the recordkeeping nightmares that can follow after those few little clicks. 

First of all, you definitely DO NOT want to pay employees with these apps. The recordkeeping nightmare that will ensue is one you don’t want to tackle, trust me! If you have a W2 employee on staff, you need to be using software, like Gusto or similar that will calculate the taxes for you based on the gross pay, deduct those taxes from the employee’s check and remit the employer’s portion of the taxes on your behalf. If you want to pay your employee $500 a week net as an example, you’re going to have a lot of calculating to do at year-end to figure out how much you should have paid them gross, not to mention all of the taxes that are now late and will accrue penalties and interest! Even if you are trying to keep up with it on a weekly or monthly basis, that is not a task you should be taking on in your business and oftentimes those manual calculations are what can you land you in a little bit of tax trouble!

Now, I’ve been asked before if Venmo can be used to reimburse employees for items they purchased for the business with their personal funds. My answer here is that it’s not the #1 method I would recommend, but if you do it because you want the money in their wallets quicker than a payroll reimbursement would be, you need to make sure you are very carefully recording the money transfer in your bookkeeping software. The employee that made the purchase should still fill out an expense report of some sort showing what they purchased, what the date was, and where the item was purchased along with a receipt showing proof of purchase. Then, you’ll want to be sure to immediately record this in your bookkeeping software because these apps don’t provide great records and many times will only show you the text that you typed when you sent it, which a lot of times when we are looking up details on our client’s accounts we see nothing typed our just an emoji that literally tells us nothing. 

Even if you have a contractor or a small business that is providing services to you and NOT a W2 employee, I still wouldn’t advise using these apps because it can also create a little bit of a recordkeeping nightmare. Just as with the employee reimbursements, these apps don’t provide any itemized detail so if you aren’t documenting every single transaction at the time you transfer the money, you are going to regret it at the end of the year when it comes time to issue 1099s to these contractors. 

Yes, that’s right – just because you are using these apps to transfer money doesn’t mean you release yourself out of the responsibility to issue 1099s. Remember, these apps don’t even recommend using them for business, and Venmo and the Cash App are certainly not going to be issuing 1099s on your behalf.

So, just like with a W2 employee, I highly recommend using a software like Gusto where you can pay your contractors easily and affordably; however, they will track each and every payment that gets sent, and then in January each year, they’ll issue 1099 to any contractor that received more than $600 in payments from you.

Now, if you insist on using Venmo, Cash App, etc. then you need to make sure you are getting a W9 from each person you pay and you also need to be very diligent about your bookkeeping. Remember, there are no itemized details available to you so you really have to record those payments in your bookkeeping software before you forget. Another reason is that you’ll need to be able to run reports in January showing how much you paid each contractor so that you can issue 1099s to those contractors. 

If you don’t have good bookkeeping showing the details of these Venmo payments, there is a good chance that in an audit, those expenses could be deemed disallowable which means you can’t deduct those payments on your tax return which means you are going to owe more in taxes!

If you’ve made the mistake of making payments this way, it’s ok – you are not alone and you can easily make the switch to a new method. I highly recommend that you check out Gusto using my link below – because it is seriously so easy to use, they are super affordable and they have the best customer service. PLUS, if you sign up using my link below, they’ll send you a free gift!

*The Gusto link is a referral link and I might receive some sort of compensation if you sign up using that link.

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