Guide to New 2022 Tax Implications for P2P App Users

Peer-2-peer (P2P) payment apps, also known as money transfer apps or mobile wallets such as Paypal, Venmo, or Cashapp, are popular online payment platforms for business - they are convenient, easy to use, and are highly efficient ways to transfer money. However, with new regulations, using P2P payment apps for business transactions will be subject to taxation in the United States.

In this article, we will discuss what is Form 1099-K, who is required to file taxes under the new rule for P2P users, and what information should be included in declaring to the Internal Revenue Service (IRS).

New P2P Tax Laws of 2022 in the US Simplified

Let's first understand the current tax rule to get a broader picture of the changes.

For the current or the old tax rule on 1099-K tax returns filed prior to 2022, the IRS has set thresholds as follows: 

• You have received over $20,000 in gross payment in a calendar year, and
• You have settled more than 200 transactions in a calendar year.

Now, the new tax rule on P2P Apps for calendar years after 2021, the IRS has changed the threshold as follows:

• You have received a gross payment that exceeds $600, and
• Applicable on any number of transaction/s.

Put simply - you are required to report your earnings on the sale of goods and services if $600 or more was processed through these platforms. If you cross the threshold, the IRS expects the third-party networks in this case the P2P Apps to issue Form 1099-K to you to report payment transactions.

Even if you do not receive a 1099-K, you are required to file the earrings in your income tax return. These new P2P tax laws will impact many users such as gig workers, online sellers, self-employed business owners, freelancers, etc.

The new taxation rule for third-party payment networks has been implemented under the American Rescue Plan, the $1.9 trillion stimulus package that came into effect in March of last year. The change doesn't impact 2021 taxes but will impact 2022 tax returns filed in 2023.

P2P Payment Apps 2022 Tax FAQs

What Are the New Tax Reporting Requirements?

To reiterate, beginning January 2022, if you receive $600 or more payments for goods and services in the current year, through a third-party payment network, such as Venmo, CashApp, or Paypal, your earnings will be reported to the IRS through Form 1099-K sent by the P2P platforms and income tax return.

The tax rule only applies to payments received for sales of goods and services and does not include payments to friends and family.

Read 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 including PayPal, Venmo, Stripe, Etsy, and others are required by law to file them with the IRS and share copies with the payment recipient.

You would receive Form 1099-K by January 31st of the following year if you received payments in the previous calendar year.

What Is Included in Form 1099-K?

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 from each payment settlement entity from which you 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 meant 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 Tax Identification (ITIN), or Social Security Number to report payments on Form 1099-K properly. Once this information is confirmed, your tax forms can be issued without a hassle.

If you cross the reporting threshold for the sale of goods and services on the payment apps, the 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 within $600. If needed, seek a licensed tax expert to assist you.

How Can Information on Form 1099-K Be Used for Income Tax Returns?

You must report any income listed on your Form 1099-K from your business on your income tax return.

Since Form 1099-K may include both taxable and nontaxable income, keeping good records is very crucial. If you receive money from a nontaxable source, such as money received as gift or splitting bills, you need not report on your tax return.

Also, make sure that your business books and records mirror your business income. Business income is generally referred to as the gross receipts on income tax returns. Your business income can be in the form of cash, checks, and debit/credit card payments.

So consider the amounts shown on Form 1099-K, along with the other payments received, when calculating gross receipts for your income tax return.

How to Maintain a Good Record for Tax Reporting?

Record keeping is vital for accurate tax reporting. If you receive the Form 1099-K at year-end, you can check your accounting records to see if the income reported to the IRS is accurate. Even if you don't receive Form 1099-K, the income still needs to be reported on your tax return.

• Go for a record-keeping system that reflects your income and expenses. Also include accounting and payroll records, bank statements, receipts, tax forms, returns, and relevant business-related financial records.
• Most importantly, set up a business account if you are receiving 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 practical when showing both taxable and nontaxable income sources if the IRS audits your income tax return.
• If you pay your business expenses using any of the payment platforms, get the invoice or a receipt from the vendor or the contractor to record the amount paid and the details of the business expense. This will serve as evidence for your expenses if the IRS questions the legitimacy of your business expenses.

1099-K Guide: What if Multiple Payment Platforms Are Used?

The IRS tax rules are the same for all the P2P platforms, including PayPal, Stripe, or Venmo, though it might be enforced differently. If you are receiving business payments from multiple platforms and the collective amounts from sales on these platforms exceed $600, consider speaking to a licensed tax professional for best practices.

You can find the contact details on Form 1099-K if you have any questions on the matter.

Are Transactions on Zelle Taxable?

While this rule applies to most third-party payment networks, Zelle is not included. Only the P2P payment companies that deal with the settlement of funds in business transactions are required to issue 1099 forms to users. Zelle doesn't process payments but facilitates communication via messages between a financial institution and people making the payments.

Zelle states that it does not report transactions made on its Network to the IRS, even if the total is more than $600. The new law to provide forms 1099K for information reporting does not apply to the Zelle Network, it added.

Will I Be Taxed in the United States for Sending Money Abroad Through a Payment App?

Most digital wallets or P2P payment platforms do not support international money transfers. The best way to send money from the U.S. internationally is through online money transfer companies such as Xe money transfer, Remitly, and Western Union.

In general, when you send money from the United States, the first $15,000 USD, per recipient will be exempt from taxes 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 beginning of the 2022 tax year, P2P platforms will be required to send Form 1099-K to users and the IRS to report payment transactions totaling $600 or more in a financial year. While this does not have any impact on international money transfer yet, existing laws that govern cross-border transactions will be applicable including Gift Tax.