Peer-2-peer (P2P) payment applications, also known as money transfer apps or mobile wallets such as Paypal, Venmo or Cashapp, are popular online payment platforms for businesses – they are convenient, easy to use and very efficient ways to transfer money. However, with new regulations, the use of P2P payment applications for commercial transactions will be subject to taxation in the United States.
In this article, we will discuss what Form 1099-K is, which is required to file taxes under the new rule for P2P users, and what information must be included in the declaration to the Internal Revenue Service. (IRS).
New 2022 U.S. P2P Tax Laws Simplified
Let’s start by understanding the current tax rule to get a broader picture of the changes.
For the current or former tax rule on 1099-K tax returns filed before 2022, the IRS has set the following thresholds:
- You received more than $20,000 in gross payment in a calendar year, and
- You have settled more than 200 transactions in a calendar year.
Now youhe new tax rule on P2P applications for calendar years after 2021, the IRS has changed the threshold as follows:
- You received a gross payment greater than $600, and
- Applicable on any number of transactions.
Simply put – you are requiredYou must report your income from the sale of goods and services if $600 or more was transacted through these platforms. If you cross the threshold, the IRS expects third-party networks, in this case P2P applications, to issue you Form 1099-K to report payment transactions.
Even if you don’t receive a 1099-K, you must report the earrings on your tax return. These new P2P tax laws will impact many users such as gig workers, online sellers, independent business owners, freelancers, etc.
The new tax rule for third-party payment networks was implemented as part of the US bailout, the $1.9 trillion stimulus package that took effect in March last year. The change does not affect 2021 taxes, but will impact 2022 tax returns filed in 2023.
2022 P2P Payment App Taxation FAQ
What are the new tax reporting requirements?
To reiterate, starting in January 2022, if you receive $600 or more in payments for goods and services in the current year through a third-party payment network, such as Venmo, CashApp, or PayPal, your income will be reported to the IRS via Form 1099-K submitted by P2P platforms and tax filing.
The tax rule only applies to payments received for the sale of goods and services and does not include payments to friends and family.
Lily Comparison between PayPal, Venmo and Zelle.
What is a Form 1099-K?
Form 1099-K, Payment Card, and Third Party Network Transactions is an IRS form used to report payments for goods and services transactions to improve voluntary tax compliance.
Payment settlement entities such as debit/credit card companies such as PayPal, Venmo, Stripe, Etsy and others are required by law to file them with the IRS and share copies with the recipient of the payment.
You will receive Form 1099-K by January 31 of the following year if you received payments in the previous calendar year.
What is included in the 1099-K form?
Your Form 1099-K includes the gross amount of all reportable payment transactions, excluding any adjustments for credits, discounts, fees, or refunded amounts.
A Form 1099-K will be sent to you by each payment settlement entity from which you have received payments in settlement of reportable payment transactions.
A reportable payment transaction covers a payment card transaction or a third-party network transaction.
The minimum reporting threshold is intended only for transactions settled through a third-party network. There is no threshold for payment card transactions.
What additional information may be required for Form 1099-K?
Your third-party payment provider may request tax information such as your Employer Identification Number (EIN), Individual Taxpayer Identification Number (ITIN), or Social Security Number to properly report payments on Form 1099- K. Once this information is confirmed, your tax forms can be issued without hassle.
If you cross the reporting threshold for the sale of goods and services on payment applications, Form 1099-K will be issued to you at the beginning of the 2023 tax period, and a copy of it will be sent to the IRS .
You can also download account statements for any reporting obligations, even if payments received are less than $600. If necessary, ask a licensed tax expert to help you.
How can information from Form 1099-K be used for tax filings?
You must report any income listed on your Form 1099-K from your business on your tax return.
Since Form 1099-K can include both taxable and non-taxable income, it is very important to keep good records. If you receive money from a non-taxable source, such as money received as a gift or from splitting bills, you don’t have to report it on your tax return.
Also, make sure your business books and records reflect your business revenue. Business income is usually referred to as gross receipts on tax returns. Your business income can come in the form of cash, checks and debit/credit card payments.
So consider the amounts reported on Form 1099-K, as well as other payments received, when calculating gross receipts for your tax return.
How do I maintain a good file for tax declarations?
Record keeping is essential for accurate tax reporting. If you receive Form 1099-K at the end of the year, you can check your accounting records to see if the income reported to the IRS is accurate. Even if you do not receive the Form 1099-K, the income must still be reported on your tax return.
- Opt for a record-keeping system that reflects your income and expenses. Also include accounting and payroll records, bank statements, receipts, tax forms, statements, and relevant financial records related to the business.
- Most importantly, create a business account if you receive business payments through a P2P payment platform.
- Maintain a separate account for business and personal transactions.
- Having a separate business account and keeping good records can be handy for showing taxable and non-taxable sources of income if the IRS audits your tax return.
- If you pay for your business expenses using one of the payment platforms, get the invoice or receipt from the supplier or contractor to record the amount paid and the details of the business expense. This will serve as proof of your expenses if the IRS questions the legitimacy of your business expenses.
Guide 1099-K: What happens if multiple payment platforms are used?
IRS tax rules are the same for all P2P platforms, including PayPal, Stripe, or Venmo, although they may be applied differently. If you receive trade payments from multiple platforms and the collective sales amounts on those platforms exceed $600, consider speaking with a licensed tax professional for best practices.
You will find contact details at Form 1099-K if you have any questions about this.
Are transactions on Zelle taxable?
Although this rule applies to most third-party payment networks, Zelle is not included. Only P2P payment companies that deal with the settlement of funds in commercial transactions are required to issue 1099 forms to users. Zelle does not process payments but facilitates communication via messages between a financial institution and the people making the payments.
Zelle declares that it does not report transactions made on its network to the IRS, even if the total is over $600. The new law to provide 1099K forms for reporting does not apply to the Zelle network, he added.
Will I be taxed in the US if I send money overseas through a payment app?
Most digital wallets or P2P payment platforms do not support international money transfers. The best way to send money internationally from the United States is to use online money transfer companies such as Xe money transfer, With reluctance, and Western Union.
In general, when sending money from the United States, the first $15,000 per recipient will be exempt from tax by the IRS under the gift tax policy. Although sending money as a gift is not taxable, you may need to report it to the IRS.
In conclusion, from the start of tax year 2022, P2P platforms will be required to send Form 1099-K users and the IRS to report payment transactions totaling $600 or more in a fiscal year. While this will not yet impact international money transfers, existing laws that govern cross-border transactions will apply, including gift tax.