A woman sits at a coffee table in a living room. In front of her on the table are an open laptop, a coffee mug on a coaster and a stack of papers topped with a calculator. The woman looks at the papers and uses her right hand to both hold a pen and type something on the calculator.
As if tax season wasn't confusing enough, new rules are emerging around income transferred through peer-to-peer payment systems. — Getty Images/mapodile

The usage of peer-to-peer, or platform-to-platform, payment systems (also known as P2P) over the last few years has become prolific. What started as a social network for paying money owed to friends for coffee, ice cream or pizza, or landlords for rent, has become widely used in the small business and gig economy as a way for buyers to pay sellers for goods and services. So pervasive are P2P payments that digital transactions are expected to account for $1 trillion by 2023.

There is little guidance and a lot of confusion about the tax implications of doing business through these platforms. However, they do exist and the government is stepping up its regulations around accounting for and reporting of P2P financials.

The top P2P players

Venmo, CashApp, PayPal and Zelle are currently among the most popular digital payment platforms. They all facilitate mobile payments through bank-to-bank communications and are seeing increasing adoption by individuals and companies alike. They each have their positive and negative points and all seem to be constantly making upgrades and offering new services as the field becomes more competitive with solutions from Apple Pay Cash, Google Pay and Facebook becoming more popular.

Whichever your preferred platform, you are responsible for knowing how it impacts how you report your business earnings.

Accounting for P2P earnings now vs. in 2022

The IRS expects businesses generating income through any third-party app to report it the same way they would report payments through more traditional means, such as cash or checks.

All third-party payment platforms are required to send an IRS 1099-K form for the previous year to small businesses utilizing their services. The form must be sent by January 31 to all small businesses that meet certain criteria: $600 in gross sales in a calendar year, regardless of the number of transactions, in Massachusetts, Maryland, Vermont and Virginia; $1,000 in gross sales with three or more transactions in the state of Illinois; and $20,000 in gross sales and 200+ transactions in all other states. Some apps, including Venmo and CashApp, outline reporting requirements on their websites.

The tricky part comes when you have mixed your professional finances with your personal ones and can’t make heads or tails out of invoices, receipts and expenses.

Beginning January 1, 2022, as part of changes enacted by the American Rescue Act Plan of 2021, anyone earning an annual total income of $600+, regardless of state or number of transactions, will receive an IRS 1099-K form in January 2023 to report third-party platform-facilitated earnings.

If you aren’t already, make impeccable accounting practices one of your New Year’s business resolutions.

Facts about Form 1099-K

Unlike a standard 1099 form, the relatively new Form 1099-K is specifically used to report earnings from the self-employed that come from payment settlement entities which include, among other things, credit cards, digital payment services or freelancer platforms that manage payments between parties. You are expected to report all sources of income generated in this way, providing detailed accounting by platform, so keeping organized records is essential.

If you transact on multiple platforms, chances are you will receive multiple Forms 1099-K if the third parties are diligent in their record keeping. Ultimately, it’s your responsibility to report all earnings over $400.

In a sole proprietorship, a Form 1099-K is applied to your self-employment income and thus is taxed as such. The tricky part comes when you have mixed your professional finances with your personal ones and can’t make heads or tails out of invoices, receipts and expenses. For this reason alone, be sure to set up business-specific accounts and profiles to limit confusion, and keep all documentation, from invoices to receipts, that may be necessary to substantiate business income and expenses.

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Published October 14, 2021