Peer-to-peer mobile payment processing apps, such as Cash App, PayPal and Venmo, have made it easy for people to send and receive money with the click of a button. To be sure, the Consumer Financial Protection Bureau (CFPB) estimates that these apps handled $893 billion in transactions in 2022. However, whether you are a business accepting these forms of payments or a consumer paying for products and services or splitting a shared expense with a friend, it is essential you understand all the potential risks and liabilities that come with using these conveniences.
Lack of FDIC Insurance
According to the CFPB, some non-bank payment apps do not automatically sweep all payments to recipients’ linked bank accounts but rather hold and invest some of those funds in accounts that lack regulatory oversight and deposit insurance. Consequently, money stored in these apps does not have the same level of protection it would receive if it were held in a traditional bank, where, in the case of a bank a failure, the Federal Deposit Insurance Corporation (FDIC) would cover up to $250,000 of depositors’ losses per deposit account. This means that if there is a run on the bank where you hold $50,000 in a checking account, $250,000 in a savings account and another $250,000 in an eligible retirement account, all your money would be insured by the FDIC and returned to you. By contrast, if you leave money in a mobile payment app that goes out of business, there is no guarantee that you will be able to recover those funds. For this reason, keep tabs on any balances you may leave in your payment apps and transfer that money to another account, such as a savings or investment account, where your money can earn interest, at the very least.
Taxes on Transactions
Beginning in 2023, the IRS requires peer-to-peer mobile payment, third-party settlement-service organizations (TSPOs) and online auction sites, such as eBay, to report the commercial payments users receive in exchange for goods and services that exceed $600 each year as taxable income. The prior threshold for reporting gross payments and issuing Form 1099-K to users was $20,000 and more than 200 transactions per year.
While it may seem obvious to whom these rules apply, users should consider all the possible ways in which their transactions may qualify as business activities. For example, you will be subject to the new reporting requirements if you earn $600 or more from a side gig, such as business consulting, tutoring or selling handmade items on Etsy. Moreover, you will be required to pay income tax on those transactions at your ordinary income tax rate, which could be as high as 37 percent. With this in mind, users should keep meticulous records of their transactions and income to verify against the Form 1099-Ks they will receive for their annual tax return filings. Similarly, users should be mindful to retain records of all business expenses they may use to reduce their tax liabilities on these now-reportable payments.
Specifically excluded from the reporting requirements are transactions that are personal in nature (i.e. splitting a check) and money transfers made with the Zelle Network, which are settled directly between users’ bank accounts. Also exempt from reporting requirements and individuals who accept mobile payments when selling previously used items, such as clothing, furniture or technology, will also escape tax-reporting requirements, unless they engage in those sales on a regular basis for business purposes.
About the Author: Kathleen Marteney, CRPC®, is a financial planner with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with PWA Securities, LLC (PWAS). She can be reached at (800) 737-8804 or via email at email@example.com.
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Kathleen Marteney is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC..
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult with your financial advisor about your individual situation
You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Posted September 6, 2023