Impacts of the American Rescue Plan Act for Businesses Using Peer-to-Peer Payment Platforms

Peer-to-peer (P2P) payment platforms, such as Venmo, PayPal, and Cash App, have become indispensable tools for both businesses and consumers. Businesses that use or accept P2P payments, particularly family businesses, need to understand the revenue reporting requirements that were included in the American Rescue Plan Act (ARPA).

P2P platforms allow users to transfer money in seconds for day-to-day expenses such as rent, groceries, and dining out. More than 60 million people use Venmo, one of the most popular P2P platforms, and given the convenience and low-cost of P2P transfers, P2P use continues to grow. This growth was accelerated by the COVID-19 pandemic, and in 2021, Venmo processed $230 billion in total payment volume, a 44 percent increase from 2020. Business owners have found P2P platforms to be a more convenient means of facilitating and generating sales compared with cash or credit card transactions. This article reviews the ARPA revenue reporting requirements and how your family business can comply with the requirements if choosing to use or accept P2P payments.

Background

The Internal Revenue Service (IRS) considers the sale of goods or services, regardless of how or where you are paid, to be taxable income. Equivalent to cash sales, some sellers have tried to fly under the radar by taking payments through P2P platforms and not reporting these transactions to the IRS. Although primarily known as the $1.9 trillion COVID-19 relief bill enacted in March 2021, the ARPA also included provisions to improve tax compliance. In that sense, the ARPA was part of the Biden Administration's larger effort to increase financial regulation and enforcement over the next decade.

What Has Changed?

Previously, P2P platforms and other companies only submitted reports to the IRS for users with at least 200 transactions and at least $20,000 in revenue each year. However, effective January 1, 2022, the threshold for income reporting by "third-party settlement organizations" has been lowered to one or more transactions that collectively raise at least $600 in revenue. This obligation extends even to profits from the sale of personal items, and the change will affect P2P platforms, as well as companies like eBay, Etsy, and Airbnb. Notably, however, systems that transfer money between banks, such as Zelle, are exempt from the reporting rule and are not required to issue tax forms for transactions above the $600 annual threshold.

For individuals or businesses who meet this annual revenue threshold, P2P platforms and other third-party settlement organizations will be required to issue a Form 1099-K to its users and file copies with the IRS. The 1099-Ks issued under the new, lower threshold will apply to the 2022 tax year, meaning users can expect to receive these forms in January 2023. In the meantime, P2P platforms may ask for additional tax information such as your social security number or tax ID number as a condition of continued use of the service.

Who Does It Apply To?

Given the prominence of P2P platforms, the changes under the ARPA raised concerns for consumers and businesses alike. It is important to note that the IRS is not requiring individuals to report or pay taxes on individual transactions over $600, and individuals may continue to use P2P platforms for expenses such as rent, dining, and gifts. The revised reporting requirements also exclude anyone selling a personal item at a loss. Instead, the changes in the ARPA target business owners and independent contractors who use P2P platforms to facilitate commercial transactions.

What Does Your Business Need to Do?

1. Understand Changes in the Law

For businesses, it may be challenging to understand what is a reportable versus nonreportable transaction on P2P platforms. P2P platforms have attempted to alleviate this confusion by making clear the business and personal transaction distinction. For example, in July 2020, Venmo created a feature for users to create and use a "Business Profile," which is separate from an individual's personal profile and has more transparency about transaction fees. Additionally, Venmo has prompted users to select "Goods and Services" whenever they are sending money to purchase an item or pay for a service.

Yet, there is nothing stopping users from using a personal account to run a business to avoid additional transaction fees and heightened reporting requirements. P2P platforms still primarily rely on businesses and individuals to self-regulate and classify the reportable versus nonreportable transactions on the front end. It can be tempting to ignore the new reporting requirements; however, doing so comes with significant tax and legal risk. To help businesses and consumers, many P2P platforms have provided educational resources, such as FAQs or blog posts, to assist in navigating the classification and reporting process.

2. Keep a Paper Trail

Regardless of whether a P2P platform issues a 1099-K to you or your business, it is still best practice to keep meticulous records of all business transactions to ensure that your business is paying the appropriate amount of taxes on income-generating sales of goods or services, including tips. Proper business recordkeeping can help you identify what other supplemental forms may be needed to accurately report your income and costs to the IRS.

Given the complexities of the ARPA and new reporting obligations, it is important to consult qualified tax advisors and legal counsel about the specifics of your business's use case prior to delving into or expanding P2P platform use.