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enmo and PayPal are two of the most popular peer-to-peer (P2P) payment platforms for consumers and businesses. Both companies have made a name for themselves as go-to options for sending money to people. Pretty much everyone uses at least one of these platforms, but did you know that tax laws are changing how you need to report in 2022? It’s important to understand what’s different so that you can pay your taxes accordingly. 

As the most recognizable names in the P2P world, Venmo and PayPal have also garnered the interest of the Internal Revenue Service (IRS) in recent years. The challenges that P2P platforms present on identifying business income have even made their way to the President, who in 2021 signed legislation that will change tax laws for users of Venmo, PayPal, and other peer-to-peer payment apps beginning this tax season. If you use Venmo or Paypal for your small business, understanding these tax law changes is vital. Read on for the details, plus tips and best practices on how to prepare for them.

What is Venmo?

Venmo is a P2P app that's been around since 2009. Roughly 60 million users have sent or received money through the payment app. Venmo is part of the PayPal family. PayPal acquired Venmo in 2013 as part of its acquisition of Braintree. 

What is PayPal? 

PayPal is one of the original online payment solutions for businesses and consumers. Founded in 1998, PayPal is available in over 200 countries, with more than 325 million accounts worldwide. 

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Reasons for P2P Tax Law Changes in 2022

IRS concerns about P2P apps have likely existed since PayPal was launched due to the nature of the apps. As more P2P platforms joined the fray, it became clear that the government would need to find ways to address potential issues these apps pose. The primary issue the government is trying to address is that most do not pay taxes on these platforms as they do on regular income. 

The Treasury Inspector General for Tax Administration (TIGTA) released a report to the public in April 2021 concerning P2P apps. The report spoke of a recent audit of P2P platforms and the challenges they pose for the IRS to identify business income.

In fact, updating the tax laws had become a priority to the current administration. On March 11, 2021, President Joe Biden signed the American Rescue Plan Act of 2021 (H.R. 1319). Most of the American Rescue Plan aims to help Americans deal with public health and economic issues stemming from the ongoing Coronavirus pandemic. Mixed into the Act, though, was updated legislation concerning the threshold for reporting payment for goods and services by P2P platforms, including Venmo and PayPal. 

Changes to Tax Laws for Venmo and PayPal

Recent changes have lowered the reporting threshold for reporting payments made through third-party payment service providers, including P2P apps. Previously, the IRS only required businesses to report transactions if they received: 

  • $20,000 or more in payments annually
  • 200 or more transactions through a payment service

If a business fell under one of these categories, it was sent Form 1099-K and was required to report P2P transactions on its business taxes.

Under the new reporting rules, any company that receives $600 gross payments (what you earn before taxes, benefits, and other payroll deductions are withheld from your wages)annually for goods or services through a P2P app will receive a 1099-K form and must report that business income on their taxes. Also, there is no longer a set minimum transaction number threshold.  

These changes only apply to businesses that utilize peer-to-peer payment apps. Companies that fall below the new standards are still required to report this income but will not receive a 1099-K form. 

Other P2P platforms affected by the 2022 tax law changes

Venmo and PayPal represent many P2P business transactions but aren't the only apps affected by the recent tax law changes. Other P2P platforms that may be subject to new tax laws include: 

  • Zelle
  • Cash App
  • Apple Pay
  • Google Pay
  • Stripe
  • Facebook Pay
  • Western Union

Check with any payment platforms you use to learn more about addressing tax law changes. 

Preparing for Venmo and PayPal Changes

If you use Venmo or PayPal to receive payments for your business, you may need to adjust how you track and report income. Running an organized business will help make the adjustment easier and improve your overall business bookkeeping system. Here are some steps you can take to be proactive about your business payments. 

Familiarize yourself with Venmo and PayPal Fees

Venmo and PayPal charge fees for businesses that accept payments through their services. Venmo charges business owners a transaction fee of 1.9% + $0.10 on all payments. PayPal fees vary depending on the payment type, with many payment types charging 3.49% plus a fixed-rate fee. 

Not all businesses need to offer P2P payment options. It depends on your business structure and whether your customer base prefers this payment option. If not, you may save yourself money and headaches by not offering the opportunity. Regardless of what type of payment option you accept, though, the chances are that you will end up paying fees somewhere. 

Separate your business and personal expenses

Some small business owners still use their personal accounts for business. Perhaps the best thing you can do for your business from an organizational standpoint is to open a separate bank account for your business. Business banking accounts are designed specifically for business owners and often come with features and tools to organize your business transactions. 

In the same vein, you should have separate Venmo and PayPal accounts for your business, too. The more you can separate your business and personal funds, the easier it will be to keep track of your business finances, making tax reporting a breeze. 

Document your business transactions 

Small businesses can benefit from implementing a system for organizing business transactions. Do yourself a favor and build a bookkeeping system for your small business if you haven't already. A sound bookkeeping system tracks all of your business transactions, including invoices, receipts, payments, deposits, credits, and more.

Create a separate category for P2P payments to further separate incoming transactions. Or better yet, keep separate listings for Venmo, PayPal, and any other payment apps used by your business. The more organized your business is, the easier it is to track down specific transactions as needed later. 
While the new reporting requirements may cause concern at first glance, there’s no reason why your small business shouldn’t be ready for tax season if you follow these steps!

Updated 
January 31, 2022
 in 
Banking 101
 category