The use of peer-to-peer payment systems (also known as P2Ps) has become increasingly popular in recent years. Though these platforms started as “social networks” for payments between friends and family members, they have become widely used in the small business and gig economy as a way for buyers to pay sellers for goods and services. P2P payments have become so common that digital transactions are expected to exceed $1 trillion by 2023.
There has historically been little guidance and a lot of confusion about the tax implications of doing business through these platforms. However, this information is becoming more readily available, and the government is increasing its regulations around accounting for and reporting of P2P financials. Here’s what you need to know about P2P system income tax reporting for the 2023 tax year.
The top P2P players
Venmo, CashApp, PayPal, and Zelle remain 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.
For business owners who are looking for the best payment processors for their needs, Helcim, Square, Stripe, and Stax are among the highest-rated providers based on transparency, features, and customer service. Some payment-processing companies prioritize online merchants over traditional point-of-sale sellers, so business owners will need to do their research to find their optimal provider.
[Read more: 4 P2P Payment Platforms for Businesses and How to Use Them]
Accounting for P2P earnings now vs. in 2023
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.
In 2023, significant changes were made to the tax reporting structure. 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.
This reporting threshold was lowered, which now means that more taxpayers will need to familiarize themselves with the required documentation. This new law was initiated and then delayed so taxpayers have some research to do ahead of this year’s tax season.
If you are a business owner, independent contractor, or earn any income from a hobby, you are now required to fill out the IRS 1099-K form. You don’t have to worry about obtaining one, as any business profile used on these P2P apps will be provided with two copies of the form so you can keep accurate records ahead of tax season.
When it comes to figuring out what taxes you owe, there might be some math involved depending on your situation:
- If you earn an income by providing goods and services from a hobby, you will be required to report your gross hobby income on Schedule 1.
- If you’re a sole proprietor or an independent contractor, you will report income on Schedule C along with any returns or allowances, as well as reporting the cost of goods sold, before deducting associated business expenses.
The main takeaway is to always keep and provide receipts, because if you earned an income this year by working independently, on an app, or another online platform, you will most likely owe taxes.
Luckily, there are many online services that provide tax preparation assistance, along with advice from experts that can be met virtually. Some apps, including Venmo and CashApp, outline reporting requirements on their websites. CO— also provides several guides and resources on preparing for the upcoming tax season.
[Read more: Choosing the Right Payment Methods to Accept at Your E-Commerce Business]
Ultimately, it's your responsibility to report all earnings over $400.
Facts about Form 1099-K
Business owners have to fill out Form 1099-K, so it’s a good idea to familiarize yourself with best practices and guidelines for how to do so.
How do I read Form 1099-K?
It is always a good idea to double-check any information on your 1099-K and make sure it matches your reported income. Ensure all your different forms of payment are accounted for — all card transactions, cash, and checks.
You also want to verify that your taxpayer identification number (TIN) is correct, and always keep verification on hand. If anything looks out of place or incorrect, contact the payment settlement entity (PSE) contact information listed on your form. Any changes you made to your business — such as selling your business — within the tax year should be accounted for.
How can self-employed individuals manage and report income from multiple payment entities?
Unlike a standard 1099 form, the relatively new Form 1099-K is specifically used to report earnings from the self-employed that come from PSEs, 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.
It is important to remember that the 1099-K might be similar to other business tax forms like the 1099-MISC or 1099-NEC, but the reported information is very different because of the introduction of P2P transaction systems. Any income that is reported on any of these forms should reflect one another before filing your tax return, and the deductions need to be explained to the IRS to avoid double taxation.
If you transact on multiple platforms, chances are you will receive multiple Forms 1099-K if the third parties are diligent in their recordkeeping. Ultimately, it’s your responsibility to report all earnings over $400.
How do I prevent confusion between personal and business finances?
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.
Learn more about 1099-K tax forms and whether your business will receive one in our guide.
This story was originally written by Andrea Forstadt.
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