How freelance taxes work with peer-to-peer payment services

Do you receive payments for your freelance business through peer-to-peer (P2P) payment apps such as Venmo, PayPal, Facebook, or other mobile platforms? If so, it’s important to know how income from these apps will impact your freelance taxes. In fact, because of the potential for these transactions to “fall through the cracks” of your regular freelance income reporting, it’s especially important to keep detailed records of them—because the IRS has already identified these platforms as a key area in which it is working to improve its tracking capabilities.

In April, the IRS released an internal audit report on the capabilities it has to investigate fraudulent activity and non-reported income on these platforms. The recommendations from the report include increasing the agency’s ability to track activity and subsequently scrutinize the tax obligations of individuals utilizing these platforms.

If you receive income on P2P networks, take note of these frequently asked questions:

Which P2P platforms are safe to use for business transactions?

Payment gateways like PayPal and Stripe were developed as online payment solutions for businesses. Facebook Marketplace and Venmo (which is owned by PayPal) are more suited toward individuals, although Venmo in particular has recently rolled out a business component to its solution.

Are there minimum requirements for reporting income from these platforms?

According to the IRS, the annual de minimis reporting thresholds are $20,000 and 200 transactions, which trigger the need to file an information return. However, starting in 2022, that threshold will drop to $600 with no transaction minimum, thanks to a provision in the American Rescue Plan Act.

If you exceed the income or transaction thresholds, the P2P platform will send a Form 1099-K to you and the IRS for the appropriate tax year. However, even if you don't make enough to receive a 1099-K, you must still report any taxable income you receive through P2P platforms on your tax return.

How do I report income received on P2P platforms?

Remember, when using these apps, you are still obligated to treat them just as you would when you accept other forms of payment. This means you must report any income received on your tax return.

Do my personal transactions have to be reported?

If you use Venmo, for example, to receive payment from a friend for their share of a meal tab, you don't have to worry about reporting such payments on your tax return. However, the moment you begin accepting business payments on a P2P platform, you're responsible for reporting those earnings.

How would the IRS know if I receive income on a P2P platform?

As mentioned above, the IRS is currently working on processes and policies for more closely scrutinizing P2P payment platforms. In addition, the P2P networks themselves are required to provide information to the IRS about customers who receive payments for the sale of goods and services through those platforms.

What is the best way to track business income through P2P platforms?

As a freelancer, any income you receive for your business services must be reported and should be tracked on an ongoing basis using an accounting system. It is also advisable to have your income from these platforms directed to a separate business account so that it is not co-mingled with your personal funds. In addition, make sure to keep detailed records of your total income earned from all sources during the year for accurate tax reporting and estimated tax payments.

You must substantiate your 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.

Should I pay business expenses through P2P platforms?

This is up to you, however, you must have a way of tracking your expenses in order to provide proper documentation, should the IRS decide to audit you. If you pay business expenses using Venmo, PayPal, or another P2P platform, you need to request an invoice from your vendor including the amount paid and a description of the business expense.

P2P platforms represent another potential freelance tax audit risk – users beware!

While using P2P platforms to receive and make payments is certainly convenient and legal, it’s vital that if you choose to do so, you are in compliance with all tax laws. Be certain to track all incoming payments so you can pay estimated taxes on them and report the income properly at the end of the tax year. Also, keep track of any expenses you pay for your freelance business on these networks so you can deduct them. As long as you treat P2P platforms just like any other source of income and expenses, there is much less chance that you will be audited by the IRS or receive an unexpected tax bill.

Jonathan Medows is a New York City-based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He provides tax, accounting and business articles for freelancers on his website, http://www.cpaforfreelancers.com, which also features a blog and a comprehensive freelance tax guide.