Peer-to-peer (P2P) payment platforms like PayPal and Venmo have emerged as go-to tools for transferring money swiftly and seamlessly. If you’re wondering about the tax implications of sending or receiving funds through these popular apps, you’re in the right place. Continue reading to understand the P2P platform’s reporting requirements and how using these apps will impact your tax filing.
What is a peer-to-peer (P2P) payment platform?
Peer-to-peer (P2P) payments refer to a digital financial transaction method that allows individuals to transfer money directly to one another using electronic devices, typically through mobile apps or online platforms.
These transactions are often quick, convenient, and user-friendly, eliminating the need for traditional methods like cash or checks. Notable P2P payment services include PayPal, Venmo, Cash App, and others.
Will I be taxed for sending and receiving money?
It depends. Whether you’ll be taxed for sending and receiving money on a P2P platform depends on the type of transaction. The IRS has explicitly stated that personal transactions between friends or family are not taxable income. However, receiving substantial amounts of money or using P2P platforms in exchange for goods or services may affect your tax return. As of 2023, the IRS will require payment platforms to issue Form 1099-K for 200 transactions that total $20,000 or more.
For 2024, the proposed plan from the IRS is that anyone with transactions totaling $5,000 or more will receive Form 1099-K. We are still waiting on further communication from the IRS to confirm this plan.
This change means that when a roommate reimburses you for their portion of the rent, a friend sends money for drinks, or a parent transfers you money for groceries, those transactions will not be taxed as income.
But let’s say you sell multiple pieces of furniture online or handmade crafts at a farmer’s market and accept payments through an app like CashApp. If your transactions total more than $20,000 in 2023, you can expect to receive a tax form documenting those transactions. You must report this income on your tax return.
Will P2P platforms report my sales to the IRS?
Yes. The IRS now requires peer-to-peer third-party payment platforms to provide information to the IRS on users who receive payments for the sale of goods and services using their apps. Beginning in 2023, the IRS requires P2P platforms to issue Form 1099-K to users with transactions totaling more than $20,000.
Read also: Why You Might Get a Form 1099-K and What it Means for Your Taxes
How do payment platforms know if transactions are personal or business?
While the platforms themselves don’t always have a foolproof way of determining whether a payment is personal or for business, they can use several indicators to attempt to identify and sort transactions accurately.
These indicators may include user account types (personal or business), transaction descriptions, the presence of specific keywords (like “rent” or “invoice”), frequency, and amounts of transactions. Additionally, some apps allow users to voluntarily categorize their transactions or provide information about the payment type, which helps the platform accurately classify.
Despite these efforts, it’s important for you to understand how your provider labels and tracks transactions so you can keep proper records. Ultimately, it’s your responsibility to correctly categorize transactions and accurately report income.
What if I received business transactions on a personal account?
If you are using a personal account for business purposes, you may receive a 1099-K that does not accurately reflect the entirety of the income you’ve collected throughout the year. It’s always a good idea to review your tax forms for accuracy when you file.
If you suspect your 1099-K is missing payments, contact the payment platform immediately to request a corrected form. If you can’t get an updated document or identify additional missing payments or transactions, you should still report that income on your tax return using your own documentation.
Learn more: The Best Way to Organize Receipts and Records for Tax Time
Can you collect payments without being taxed?
Receiving money through peer-to-peer (P2P) platforms doesn’t automatically mean those transactions are taxable. Whether the IRS taxes these payments depends on the nature of the transaction and the amounts.
Those transactions are not taxable if you are receiving payments from friends or family for personal reasons. However, if you are receiving payments for goods or services rendered, that income may be considered taxable.
If you are accepting some or even all your business income through peer-to-peer payment platforms, consider creating a separate business account with the platform. Dedicating an account to business use will keep your personal transactions from being mistakenly reported on a 1099-K as a business transaction.
Do you have to pay taxes on Zelle payments?
The IRS does not require Zelle to send tax documents for transactions within their network but if you receive payments that are considered taxable, it’s still your responsibility to keep track and report those on your tax return.
TaxSlayer makes reporting Form 1099-K easy! Get more details on updates to Form 1099-K here.
