At its core, fintech (financial technology) is relatively simple: it is defined as any technology that helps businesses and consumers carry out financial tasks.
But as the fintech industry has become more and more successful, it has become more and more complex—leading to some significant changes in reporting and taxation processes. Financial professionals of all stripes should be aware of these changes so they can successfully navigate the current tax season.
The Rise of Fintech and P2P Payments
Fintech was first developed to automate the back-end systems of large financial institutions. But since the advent of smartphones, fintech has grown and evolved far beyond that. These days, businesses and consumers can find fintech solutions for nearly every problem they face—and those problems are numerous, particularly given all the financial complications that have arisen because of the pandemic.
In addition to large-scale issues like inflation and unemployment, Americans have had to contend with limited access to financial services, curtailed banking hours, coin shortages, and the increased risk of infection associated with cash and PIN pads.
As a result, larger businesses have raced to digitize their operations, and small businesses have increasingly turned to peer-to-peer (P2P) payment platforms like PayPal and Venmo. New businesses in particular—of which there has been a dramatic surge—have used P2P apps as a way to save on credit card fees and keep pace with the ever-evolving needs of the modern customer.
Now, consumer adoption of P2P payment platforms has reached an all-time high. A 2020 report published by the Mercator Advisory Group revealed that 70 percent of American adults used P2P services that year—a sharp increase from the 57 percent who used them in 2017.
For many, P2P apps now rival banks in every meaningful way—many such platforms offer lines of credit, relief payments, checking account services, and a number of equally convenient features. But the expanded features that P2P platforms offer for their business customers have also created serious complications in the traditional systems for reporting business income to the Internal Revenue Service (IRS).
The IRS has taken note of the mushrooming P2P payment economy. In April 2021, the treasury inspector general for tax administration published an audit report of P2P platforms, which described the mass adoption of these payment tools and outlined the difficulties they present for identifying and taxing business income.
In response to that report, the IRS began developing strict regulations for P2P business transactions—those changes were introduced in the American Rescue Plan Act of 2021 (H.R. 1319) and took effect on January 1, 2022.
What You Should Know for Tax Season
Whether you represent an established company, own a small business, or run a freelance enterprise, these new regulations will likely affect the way you file taxes this year.
Until recently, businesses only needed to report income to the IRS if they had received more than $20,000 in P2P payments or completed more than two hundred transactions. Under the new mandates, business owners in the United States are required to file a 1099-K form if they earn more than $600 a year—a small fraction of the previous threshold—through P2P apps. Moreover, these regulations take effect regardless of whether the business in question is a sole proprietorship, an LLC, or a partnership.
These regulations mark a sea change in the way many businesses will approach tax season. But with a rigorous P2P payment documentation system in place, your business should weather the storm just fine.