The IRS minimal reporting threshold has been lowered from $20,000 to $600 for businesses completing transactions over peer-to-peer payment platforms, such as Venmo, PayPal, Cash App and Stripe, following tax code provisions in the American Rescue Plan Act of 2021.
Under the rule, which covers 2022 tax year transactions, third-party platforms that transfer money from a buyer of goods or services to a seller must issue the business a Form 1099-K if they receive $600 or more from that buyer in a calendar year. Form 1099-K includes annual gross amount of all reportable payment transactions made through a payment card or third-party payment network.
Businesses would start to receive these forms in January 2023 before next tax season.
“Most small businesses should already be accounting for all their transactions and income from customers, so this new rule is simply aimed at the IRS collecting taxes on taxable activities that businesses aren’t properly reporting on,” said Gina Rachel, a director in the Postlethwaite & Netterville Metairie office who has worked with businesses and individuals in tax consulting and planning for more than 20 years.
“If you’re already doing what you are supposed to and practicing proper accounting and bookkeeping measures, then don’t be too concerned with this new rule; just be aware of it,” Rachel added. “Even if you don’t receive a 1099-K, you’re required to report business income through these peer-to-peer platforms on your income tax return over the threshold amount.”
Four out of every five small businesses (82%) report that they use at least one digital peer-to-peer, third party platform to accept payments from customers, according to a June 2022 survey of small businesses conducted by the Electronic Transactions Association and The Strawhecker Group.
With growing popularity among these platforms, this new IRS rule may open more businesses to audits, and they may receive IRS notices if they don’t correctly report their earnings, said Rachel.
“Most of these platforms already allow you to open business-specific accounts, separate from your personal account, so you want to do that if you already haven’t. That’s less of an accounting and bookkeeping nightmare down the line,” said Rachel. “It’s like when any new small business clients first meet with us – we do due diligence that they have separate business and personal bank accounts, business and personal credit cards, and their transactions are differentiated between their personal lives and business operations.”
An additional proactive measure for small business owners can be to consolidate peer-to-peer payment options.
“I know as a small business owner it can be valuable to offer every payment service possible to your customers, but maybe find that one platform or two that proves most valuable and convenient for you and your customer, and consolidate,” said Rachel. “A minimized number of third-party platforms is helpful to simplify the bookkeeping process. It’s a matter of finding the right business model for these online collections.”
Small business owners are advised to invest in bookkeeping software outside the peer-to-peer platform to cross-reference the platform’s records and properly document sales, expenses (including fees from platforms) and profits. They should also consult with a tax preparer or accountant on the new rule to avoid any auditing issues.
“This is all new to third-party platforms, and we may see them raise their hands before 2023 with all kinds of questions and concerns, so if you’re a small business owner don’t hesitate to ask a question about the rule before an auditing issue occurs. Remain proactive,” said Rachel.