Han Park: CEO at Payment Labs Explains How they Address Tax Compliance Requirements for Clients

There’s new regulation requiring individuals using digital payment apps to report their earnings – over $600 – directly to the IRS.

This change significantly impacts business owners, side hustlers, and gig economy workers. These individuals must file Form 1099-K, creating an extra step during tax season.

The payment platform, Payment Labs, claims that it eliminates this headache during tax season by handling tax compliance for clients, saving them money, time, and significant liability. The growing company has reportedly processed over $5 million in prize payments, and claims it is trusted by Ubisoft, Sega, Dreamhack, and many others.

Han Park, the Founder and CEO at Payment Labs, has shared their views and insights regarding these developments.

Our conversation with Han Park is shared below.

Crowdfund Insider: How will the IRS enforce this new law?

Han Park: Having already announced the delay of this tax change for a year, I expect that the IRS will be slow to roll out the enforcement of the new law for people who receive $600 or more in business payments on third-party payment platforms – such as Venmo, PayPal, or Stripe – to receive Form 1099-K. At least for the first few years, the enforcement is likely to fall on the payment platforms.

Sending out Form 1099-K is burdensome for many payment platforms, especially for individuals who use these platforms for receiving both personal and business payments. The payment platforms will now need to identify the payer as either a business or an individual, if the purpose was business-related (which may or may not be taxable) and then provide reporting transparency that shows the user how much in taxable payments the user has received that will be reported to the tax authorities by the platform.

This is an additional tax form that users must fill out and keep track of – creating added work effort and stress for the payment platforms and their users during the already busy tax season.

Although IRS enforcement is unlikely to pick up until a few years in, businesses may still be penalized for not reporting or issuing 1099 forms. Something we see quite often is the IRS auditing and coming back to collect unpaid funds a few years later – once interest and fees have accrued.


There's new regulation requiring individuals using digital payment apps to report their earnings - over $600 - directly to the IRS Click to Tweet

Crowdfund Insider: Who will be responsible for educating payors and users on the reporting laws?

Han Park: While enforcement of the reporting laws will be set in place by the IRS, payment platforms fall responsible for educating their users on the upcoming changes and sharing information about how this will impact their use of the platform. I expect that many peer-to-peer (P2P) payment platforms will change their product features or dashboard layouts to efficiently track business payments – making it simple for users to understand if or when they will receive a 1099-K form.

Some platforms, such as Venmo, have shared FAQs about these tax changes, including who will be impacted and what will be required of both payors and payees. Educating users on the reporting laws is crucial because one of the last things payment platforms want is for their users to be surprised or confused when a tax form comes their way.

Crowdfund Insider: What types of payment platforms will be affected the most and why?

Han Park: The new IRS regulation will impact all third-party payment platforms, including, but not limited to, Venmo, Shopify, PayPal, Clover, Amazon, Square, or Stripe. However, P2P payment platforms – such as Venmo, CashApp, and PayPal – will be highly impacted by this change.

P2P payment platforms have a significantly lower barrier to entry and little to no fees when compared to other payment platforms, such as Clover or Square. The simple registration and complementary processing are significant draws for individuals or small businesses looking to get started on a payment platform. But, due to the new regulations, these businesses and individuals will be hit with additional forms and fees when tax season rolls around.

Crowdfund Insider: What responsibility do users have relating to taxes and reporting?

Han Park: Beginning in 2023, Payment Settlement Entities (PSEs) – payment card and third-party payment professors – must file Form 1099-K on behalf of each organization or individual who receives $600 or more for the sale of goods and services using their platform.

However, users are responsible for completing and filing the tax form received from their PSE. This form includes basic information – such as the filer’s name, address, and bank account number – and more granular information – such as the gross amount of payment transactions on the third-party payment platform per month.

This creates another tax form and set of reportable tax amounts for individuals’ and business owners’ annual personal tax filings. If an individual uses multiple payment platforms to receive business payments, they will receive 1099-Ks from each platform. This creates additional effort and stress for the payment platforms and their users during the already busy tax season.

Crowdfund Insider: What are the penalties and fines for users?

Han Park: Although the IRS may be slow to enforce these new regulations, businesses can still be fined or penalized for not issuing 1099 forms. In 2022, if a business intentionally fails to issue a form 1099, the penalty varies from $50 to $280 per missing form.  Additional fees of a minimum of $570 per form or 10% of the income reported on the form with no maximum penalty to businesses for not providing accurate payee statements. These penalties and fees can quickly add up and be very costly for businesses.

For end users who receive business-related payments that reach the $600 annual reporting threshold, tax holds and 24% backup withholding may occur if they fail to provide their tax information.

These penalties will be imposed on anyone who fails to complete their tax forms or to provide their tax ID. All funds sent to the IRS for backup withholding cannot be returned to the user.

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