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Tax tips for P2P payment platforms

illustration of a laptop showing images that imply making a payment online

The increased use of mobile payment apps such as Venmo, PayPal and Facebook (also known as P2P or peer-to-peer platforms), may have you wondering how these apps affect your taxes. Here's a short primer on the new world of P2P platforms.

How to use P2P platforms effectively

PayPal and Stripe were designed as online payment solutions for businesses. However, Venmo, which is owned by PayPal, is geared toward individuals—although it does allow some businesses to use the platform. 

Keep in mind that when you use these apps, you’re obligated to treat them just as you would any other form of payment you accept. For example: 

You must report income

If you’re just sending money back and forth for your share of dinner with friends, those payments don’t need to be reported on your tax return. However, the moment you begin accepting business payments on a P2P platform, you're responsible for reporting those earnings. And since P2P payment platforms are required to provide information to the IRS about customers who receive payments for the sale of goods and services, you’ll have no choice but to report them. 

That being said, the threshold for reporting those payments is on the high side. According to Intuit.com, P2P platforms are required to report gross payments received for sellers who receive over $20,000 in gross payment volume and more than 200 separate payments in a calendar year. If you cross this threshold, the platform will send you and the IRS a Form 1099-K at tax time. But even if you don't receive a 1099-K, you're still required to report any taxable income you receive through these platforms on your income tax return. 

Due diligence is required

If you receive some or even all of your business income through a P2P payment platform, you should set up a business account. Otherwise, your business and personal transactions will be intermingled, making it difficult to separate business and personal payments. Be sure to keep detailed records of your total income earned from all sources during the year for accurate tax reporting. 

If you do receive a 1099-K, you can use your accounting records to ensure the income reported to the IRS on your behalf is correct. Tracking it outside the P2P platform will ensure that you have the information necessary to report all of your income on the appropriate forms. 

You must substantiate expenses

It’s important to keep detailed records of the costs related to your income, regardless of its source. This includes any payments made or received through P2P platforms, as well as other business expenses.

In the eyes of the IRS, using a P2P payment platform is similar to paying cash, which the IRS considers to be an unsubstantiated transaction. Therefore, you must retain supporting documentation such as invoices, receipts or expense reports to verify the business purpose of payments made through a P2P platform.

If you pay business expenses with Venmo, PayPal or another P2P platform, make sure you get an invoice from your contractor or receipts from vendors. This documentation should include the amount paid and a description of the business expense.

Another important point: For businesses, any payments made to you through a P2P app will need to be properly accounted for and are subject to IRS Form 1099 reporting rules. From an IRS perspective, business income collected through a P2P app is no different from any other transaction that goes through a traditional bank account. Businesses are still required to report any payments received through Venmo and PayPal as taxable income when filing taxes. 

Use P2P platforms for convenience, but be sure to keep in compliance!

The convenience and simplicity of these P2P methods have made them very popular. However, if you use PayPal, Venmo or other P2P platforms for business or personal expenses, it’s important to track all income and expenses to ensure you’re in compliance with tax laws—and don’t end up with an unexpected tax bill or an IRS audit. 

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