Why you shouldn’t use apps like Venmo and PayPal for payroll

venmo, paypal and other apps are not payroll

While many businesses use payroll solutions to pay W2 employees, they often rely on other apps to pay independent contractors and 1099 workers. Due to their ease of use and popularity among consumers, it comes as no surprise that business owners and managers are drawn to peer-to-peer (P2P) payment solutions like Venmo, PayPal, Zelle, and Cash App to send contractors the money they’ve earned nearly instantaneously.

Of course, these tools can certainly be used to send money from Point A to Point B. But they were never designed as payroll solutions and, in some cases, using them to pay your business’ independent contractors is a terms of service violation that could cause your account (and your funds) to be suspended. 

If you’re using tools like Venmo, Cash App, Zelle or PayPal for payroll, keep reading to learn about the seven top reasons you should stop using these apps to pay contractors fast and switch to payroll software that offers on-demand pay instead.

1. Reporting nightmares

When you use a P2P app like Venmo for payroll, you won’t have access to reporting tools that enable you to determine things like how much you’ve paid each contractor over a specific period of time, total contractor payments for a given quarter, and what your payouts are projected to be next quarter. Not only does this prevent you from making the best financial decisions for your business, it can also leave you with serious headaches come tax time — particularly when it’s time to issue 1099 forms.

Remember, even though contractors are not your employees, the IRS still requires you to issue Form 1099-NEC to each of them who’ve earned at least $600 over the course of the year. Without a payroll system in place, figuring out which contractor made how much can be quite the undertaking. Since 1099 forms are due to both the IRS and contractors by January 31, the last thing you want is to have to scroll through a year’s worth of payment histories and compute total payouts by hand when time is of the essence.

2. Increased tax obligations

Using P2P payment apps won’t absolve you from tax obligations — no matter what potential policy changes might mean for services like Venmo and taxes. 

When you use a P2P app to pay contractors, you need to collect W-9 forms from each contractor to capture their tax information, and you also need to maintain meticulous records of each payment. That way, in the event your business gets audited, you’ll be able to prove the payouts were for work-related expenses. On the flip side, failure to maintain adequate documentation could ultimately prevent you from being able to deduct those expenses altogether, which could increase your tax obligations.

With a payroll system in place, this information can be captured automatically, without heavy lifting, which enables you to rest comfortably knowing that each payment is an audit-ready, verifiable business expense.

3. Lack of visibility into payment errors

Despite a payroll administrator’s best intentions, errors come with the territory. In fact, one study found that 82 million U.S. workers have experienced a payroll error at one time or another. Maybe the payroll admin made an error when inputting the payment amount or maybe the worker provided the wrong payment information.

Whatever the cause may be, it’s very difficult to determine if a payment error has been made when you’re using a tool like PayPal for payroll. Chances are you won’t find out about the mistake until the contractor asks where the money is. In an age where nearly two-thirds of Americans are living paycheck to paycheck, even the smallest delay in payment could cause a contractor to seek employment opportunities elsewhere.

On the other hand, when you make a payment mistake through a bona fide payroll system, that payment will bounce back, and you’ll receive a notification. This enables you to take a proactive approach to solving the problem — delighting your impacted contractor.

4. New hire onboarding difficulties

Since Venmo, PayPal, and other P2P payment apps are designed primarily for friends and family members to send money to each other, there isn’t a new hire onboarding flow contractors can follow to get properly set up to receive payments. Instead, the bulk of the responsibility falls onto the shoulders of the payroll administrator, who is tasked with inputting relevant payment details into the platform they’re using. Fingers crossed the contractor sent over the proper information and the admin doesn’t make any mistakes when loading it into the system.

A dedicated payroll system solves this problem by requiring contractors to follow a well-defined onboarding flow that asks them to input all relevant payment details like their name, address, bank account number, routing number, and Social Security number. This drastically reduces the likelihood an error occurs. And if one does, the contractor can only blame themselves for the mistake.

5. Can’t give employees pay stubs

While some 93 percent of U.S. workers receive payments through direct deposit, many contractors and freelancers still want to see their pay stubs at least every now and again. That way, they can keep track of how much money they’ve made over a given period of time instead of having to wait to find out when a 1099 form is issued.

Unfortunately, when you’re using a P2P payment app to pay contractors or freelancers, those who want to look at pay stubs are out of luck. In fact, there isn’t much that they can do other than search for transactions manually to find out when payments came in. This makes it much more difficult for contractors to understand what their tax obligations might be at the end of the year.

Payroll platforms give contractors complete visibility into how much they got paid and when. Not only can they see how much they’ve made during the current pay period, they can easily pull up historical data to get a better sense of their earnings to date — and even how that compares to previous years.

6. Inability to pay W-2 employees and contractors with the same system

Even if you currently only employ contractors, you’ll eventually have legitimate employees on payroll sooner or later as your business begins to scale — or as other laws like California’s AB5 go on the books, effectively reclassifying current contractors. 

If you’re still using services like Venmo and PayPal for payroll at that point in time, you’re going to regret it — if for no other reason than you will need a new business solution to process employee payments and handle withholding for tax purposes. 

There’s no sense in using two different payment solutions if you don’t have to. By investing in a single tool designed to enable you to pay 1099 contractors and W2 employees, you can process payments from one place while complying with federal and state tax laws — including support for automatic remitting, filing, and reporting. This, in turn, makes the payroll process much more seamless — and your payroll team will be happier because of it.

For more information on the benefits of using one payroll system to pay both W2 employees and 1099 contractors, read this case study.

7. Less peace of mind

While tools like Venmo and PayPal might be perfectly fine for sending payments to friends and family, they’re nowhere near as secure as payroll solutions. 

For starters, P2P payment apps don’t offer FDIC insurance. In the event a contractor maintains a balance on an app, and the app went out of business for whatever reason, that money might disappear along with it. Further, transactions on some P2P apps are public unless users decide to make their profiles private. Users that forget to make the switch might be uncomfortable when personal details about their transactions are easily found out.

On the business side, once money is sent via a P2P payment app, it’s essentially gone. If you make a mistake — say, sending too much money or sending money to the wrong person — it can be extremely difficult to get it back. Your best bet is to have that recipient send the money back to you. How many people would actually do that? Do you even want to find out?

By sending money directly to employee bank accounts, deposits are FDIC-insured as long as they’re held in a checking or savings account, and payments remain private. In the event you make an error, you can recall the payment and issue a new one. This protects your finances while preventing you from having to hassle people to return funds they received in error.

Can you pay employees with Venmo?

While you can certainly pay your workers using P2P services, there are much better options at your disposal. We’ve reviewed a number of reasons why purpose-built payroll software is an easier, more compliant option than P2P apps to pay contractors, freelancers and gig workers. With the right payroll platform, paying workers can be as easy as using an app—plus, it will save you a lot of headaches in the long run. 

To learn more about the easiest and fastest way to pay contractors and employees, check this out.