Person-to-Person Payments

Zelle… Venmo… Square… PayPal… Cash App…

Options for person-to-person payment services (P2Ps) have exploded over the last decade.

Venmo is known for its social aspect—an estimated 30% of transaction descriptions include emojis. However, don’t be surprised if you hairdresser requests payment through the app. On the other hand, Zelle is popular for being directly integrated with online banking and therefore offering faster processing than its competitors. Big-name banking institutions that partner with the service include giants such as Citigroup, Bank of America Corp, Chase, Morgan Stanley, and Wells Fargo. In 2017, its first year in operation, Zelle processed $75 million in transactions. In 2020, the company processed $307 billion.

As more and more of our economy moves through electronic channels, the IRS is turning its attention to capturing income that might otherwise go unreported. While transfers to repay friends, for example, do not have taxable implications, transfers used to pay for goods or services were always required to be reported as income by the seller. But now the onus for reporting income is shifting from almost entirely on the seller to the platforms that facilitate these transactions.

New IRS Requirements

Previously, the IRS required P2Ps to report transactions for goods and services sold that met or exceeded $20,000 and at least 200 transactions in a calendar year. Starting in 2022, that threshold is slashed to just $600. Anyone who receives at least $600 in payments for goods and services through a P2P can expect to receive a Form 1099-K by January 31, 2023.

Form 1099-K—given the straightforward name “Payment Card and Third-Party Network Transactions”—is a tax form used to report payments for goods and services transactions. Intermediaries like credit card processors and payment services are required to file them with the IRS and send copies to the payment recipient. In preparation for meeting these filing requirements, P2Ps are pushing their users to provide necessary information, like social security numbers or other tax identification numbers. For example, Venmo has placed a hold on users being able to transfer money out of their account until they provide their tax information. Users have spoken out about the hold, but the platform is less concerned with disgruntled users than the penalties that back up IRS requirements.

Importantly, start-ups that do not reach the $600 threshold to receive a 1099-K may still have income required to be reported. Unofficial statements should be provided on your online account, and they should always be provided to your tax preparer.

Heightened reporting requirements are the new normal for taxpayers and financial services firms alike, especially as our economy shifts away from cash payments. And electronic payments are only growing more complex. For example, Cash App allows users to make payments using Bitcoin which poses the additional complication of cryptocurrency exchange rates when calculating tax implications.

For entrepreneurs who may be receiving 1099-Ks for the first time, proactive tax planning is more essential than ever. The right accounting firm will not only meet the IRS’s compliance standards but also take advantage of credits, deductions, and taxation decisions to ensure the most beneficial outcome for their client.