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Using Peer-To-Peer Payment Apps To Accept Payments From Customers? Here’s How It Impacts Your Business Tax Information Reporting

Note: IRS delays the rollout of the $600 threshold for 1099-K reporting.
The threshold for Form 1099-K remains at $20,000 with a 200 transaction limit for the year 2023. This delay designates 2023 as a transition period, maintaining the existing requirements for reporting.

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Here’s what happens when you use peer-to-peer payment apps like Venmo and PayPal to accept payments from your customers, according to the American Rescue Plan Act (ARPA) of 2021.

We all like convenience.

We like things easy and simple.

And technology is no exception to this.

Businesses use peer-to-peer payment apps like Venmo and PayPal to accept payments from their customers.

Be it a coffee shop down the street or your favorite merchandise store online, digital payments are winning the race of convenient payments.

The utility of digital payments increased during the pandemic.

When news broke that dollar bills also contribute to the spread of the Covid-19 virus (because the virus could survive on surfaces for days), cash payments were on a halt and digital payments were preferred.

This was one of the factors that lead to the growth of digital payments infrastructure during the pandemic.

And why not?

Digital payments are easy, simple, and can be completed within a second or two.

Many people associate digital payments with convenience.

Businesses had to catch up with the consumer market, which was quickly shifting to digitized payments before and through the pandemic.

The rise of the gig economy during the pandemic only furthered this trend, and now most businesses are expected to provide digital/mobile payment options like Venmo or PayPal to boost customer experience.

Understanding Peer-To-Peer or P2P Payment Apps

Peer-to-peer payment apps are third-party payment settlement apps like Venmo, Apple Pay, PayPal, and Cash App.

These apps are intermediaries between businesses and consumers.

A simple purchase scenario looks something like this in 2022.

Want to buy a T-shirt?

Place the order online.

Pay with a P2P app like PayPal or Venmo.

And you’re done.

No more worrying about cash or going to the ATM.

No more contemplating if you need to stay home to accept the order and pay on delivery.

Digital payment apps have increased customer expectations and brought in a whole new level of convenience.

But there’s another side to these payment apps that’s not really talked about that often.

Compliance.

Payment apps, like any other business in the U.S., are required to comply with the IRS tax rules.

When a customer goes online to purchase an item from a seller, the payment is processed by a third party, known as a payment settlement entity (PSE).

These payment settlement entities are required to prepare and file a Form1099-K to report third-party payment network and payment card transactions that occur in a calendar year if the gross total of such reportable payments is $600 or more.

Meaning: If Venmo helps your business accept $600 or more in a calendar year from customers, then Venmo is required to prepare and issue a Form 1099-K to you and file the same with the IRS.

But all’s not well in the 1099-K economy, with the IRS introducing new changes to 1099-K form to regulate the P2P ecosystem.

What Has Changed?

Previously, the IRS required businesses to report with and file a Form 1099-K if the gross total of reportable transactions is $20,000 or higher, and if the total number of transactions was more than 200.

This held true for all calendar years before 2021.

However, this quickly changed when the ARPA and the Biden administration’s regulatory policies came together to modify the existing 1099-K reporting requirements.

Now, the IRS requires PSEs like Venmo and PayPal to file a 1099-K for each participating payee to whom they’ve paid $600 or more in a calendar year, with no reservations on the transaction limit.

Now, this was a drastic cut in the minimum reportable cap. As a result, many payment apps have notified their payees about this change.

The change is effective starting January 1st, 2022.

This applies to all third-party payment networks, payment card companies, and payment settlement entities.

Impact On Businesses Using Payment Apps

The recipient of such payments may not be happy with the change in the reporting requirements for 1099-K because the changes mean more income transparency.

True, this may be a sudden change. But there’s still plenty of time to get things in order.

It doesn’t matter if you’re an online business or a bootstrap startup in a business center. You will be issued a Form 1099-K from the P2P payments app company if you’re accepting payments beyond $600 from your customers in exchange for goods and services.

It’s important to note that 1099-K payments only constitute transactions that involve goods and services.

Personal fund transfers to a friend, or paying your half of the dinner bill to a friend via Venmo, and other kinds of personal payments through a payment app, are not considered for 1099-K reporting.

Certain payment apps are now allowing the consumers to choose if the payment they’re about to make is for “business” or “personal” purposes.

So, categorizing and separating the two would be easier.

What You Can Do As The Recipient Of 1099-K Payments?

If you’ve received more than $600 in settlement of third-party payment network or payment card transactions, then you will be issued a Form 1099-K.

It might seem just easier to ignore the law and hope that the IRS won’t notice it. But the reality is that the IRS is vigilant. If you’re not declaring all of your income, the payer will.

And the IRS may follow up with you basing those payment reports, which can be very challenging in the long run.

It’s best to stick to the legal practices and regulations to avoid non-compliance citations and notices from the IRS. 

So, here’s what you can do to comply.

Understand the change of tax law

Form 1099-K changes were introduced in accordance with the provisions in the American Rescue Plan Act (ARPA) of 2021. So, it’s critical to understand that Form 1099-K changes are here to stay.

The sooner you start complying, the easier your 1099 filing season will be.

If you’re partnered with a third-party payment app for your business, check out their online resources and merchant pages to find answers to your 1099-K queries. You can also approach their merchant helpdesks to find specific answers.

Give this read a quick review to understand the 1099-K 2022 reporting requirements in depth.

Interpret Form 1099-K

Use the information provided on the 1099-K form to verify the actual payments received by your business. Make sure that the gross total matches the gross total of the income you’re reporting on the business income tax forms.

Save a copy of every 1099-K form issued to you through the years for information and claims purposes.

If there are discrepancies in the 1099-K reports, you can use the issued 1099-K forms and invoices/receipts as proof of payments received.

Maintain comprehensive payment records

It’s important to maintain a transparent and clear record of all the transactions with the PSE.

Even if you’re exempt from maintaining books, it is only logical to maintain the records to keep a track of the payments received as income.

Additionally, the compiled information can be used to prepare your business tax returns.

Incorporate reliable accounting software into your business ecosystem to maintain an accurate record of your transaction data.

Choose the best accounting tools from Tax1099’s integrations, so when you finally decide to eFile 1099-K form, you can easily sync the data without switching platforms.

This way, everything is in one place.

Payment settlement entities have a lot to deal with as well.

The changes first apply to the preparer, which impacts the reporting.

So, it’s essential for PSEs to prepare and file their 1099-K returns accurately.

If you’re looking at eFiling 1099-K forms in bulk, consider signing up with Tax1099, an IRS-authorized eFile provider, trusted by 200,000+ businesses like yours.

With Tax1099, you can:

Schedule a Free Demo | Check out our Tax1099 API

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