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f you use a peer-to-peer (P2P) payment platform for your business transactions, major changes to tax laws are taking place in 2022, which could significantly affect your small business.
Peer-to-peer (P2P) payment platforms are an easy way to transfer money between two parties, whether personal or business-related. Two of the most-used examples of these platforms are PayPal and Venmo. In recent years, P2P apps that offer business services have become a primary focus of the Internal Revenue Service (IRS) because they prove challenging to report business income.
The threshold for having to report payment for goods and services through a third-party payment network was lowered considerably starting with the tax year 2022. This means that your small business may have to report to the IRS where you didn’t before. It will be essential to keep track of your finances and keep your business transactions separate from your personal transactions.
Here's what you need to know about P2P platforms and how the new tax laws may affect your small business in 2022.
What is a P2P platform?
A peer-to-peer or P2P platform is a service or app that allows you to send money quickly to other people or businesses. PayPal was one of the first platforms to enable easy money transfers between individuals. Other popular P2P apps include Venmo (owned by PayPal), Stripe, Cash App, Zelle, Apple Pay, Google Pay, and Facebook Messenger. Even Western Union, one of the oldest payment service companies globally, has entered into the P2P space with its Money Transfer mobile app.
P2P apps make it easy to split bills or pay someone back. If a group is out to eat, one person can pay the bill, and everyone else can send payment instantly through Venmo or another app. P2P payment services are typically free for users but often charge businesses fees for allowing customers to pay through these services.
How P2P Payments Work for Businesses
Most businesses that offer online customer payments use third-party payment services to manage transactions. Online companies like eBay and Etsy have utilized P2Ps like PayPal to handle customer payments for years.
Customers may choose between several payment options depending on the vendor, including a P2P app. Payment is integrated directly into the purchase process in some cases, so you never leave the screen. Other sites may redirect you to the payment app site to enter payment information.
There's no extra charge for customers to choose a P2P payment option in most cases. To utilize PayPal, Venmo, Cash App, and other apps as a business usually involves paying merchant fees. Companies used third-party payment services long before P2P platforms existed, so paying fees for processing payments is nothing new. Also, not all P2P apps offer business services. Some are specifically geared towards personal use and discourage creating accounts for businesses.
Tax Implications of Using P2P Apps
Businesses and entrepreneur taxpayers have been required to report payments received through P2P apps since 2012. Until recently, the threshold for required reporting of payments was much higher. Businesses were only required to report income to the IRS if they had received:
- $20,000 or more in payments annually
- 200 or more transactions through a payment service
A comprehensive report was released in April 2021 by the Treasury Inspector General for Tax Administration (TIGTA) that addressed a recent audit of P2P platforms and their challenges in identifying business income. This report has instigated new laws that result in tax changes.
President Joe Biden signed the American Rescue Plan Act of 2021 (H.R. 1319) into law on March 11, 2021. The majority of this new legislation focused on the coronavirus pandemic's public health and economic crisis.
However, buried within this new law were proposed changes to transaction reporting requirements for P2P platforms. These tax proposals were recently approved by congress.
The new tax law goes into effect on January 1, 2022, and applies only to businesses using these apps. Instead of a threshold of $20,000 or 200 transactions annually, the new tax plan makes the change that any company receiving $600 annually for goods or services using a P2P platform will receive a 1099-K form and is required to report that business income on their taxes. There is no longer a minimum transaction threshold to trigger a 1099-K form. This change in taxable income could affect your tax return.
If you collect $600 or more in payments, you should receive a 1099-K form from the P2P platform. If you are under the limit, a 1099-K won't be issued, but you are still required to report that income. This law takes effect whether you’re an LLC, a partnership, or just a freelancer.
The changes in how P2P payments are reported may or may not affect your business. If you've already been claiming income received through third-party payment apps, it might not change anything for you.
How To Prepare For Changes to P2P Taxes
While the changes to income reporting for P2P apps will be an adjustment for many small business owners, you can take steps to make the process easier.
Keep business finances separate.
One of the best things you can do regardless of what type of business you own is to keep your business finances separate from your personal finances. Keeping independent banks accounts, budgets, and systems for your business finances makes monitoring transactions like P2P payments easier.
Document all of your P2P transactions
Another way to stay organized is to keep detailed records of all business transactions, including P2P payments. Not only will this help your business overall, but it will also help you identify specific transactions later on if needed. If your P2P transactions are over $600 total, you should receive a 1099-K from the P2P platform, but it's not a given. You should keep your own records too. Keep and file any invoices or receipts related to P2P transactions.
Consider making P2P payment documentation part of a larger business plan and small business bookkeeping system.
Determine if P2P payments are worth the cost
Using P2P apps usually costs money in the form of fees. Depending on your business type and structure, it might not be necessary to include P2P payment options. Think about your business, your customer base, and the fees charged for payment services to determine whether using P2P platforms makes sense for your business.
The bottom line is that business owner taxpayers will be more likely to have to report P2P transactions to the IRS starting in 2022. Be aware of your finances, and you’ll be just fine!
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