Will a third-party payment platform work for your business?

Managing payments can be complex and time-consuming as a small business owner. However, accepting payments has never been more accessible with the rise of third-party platforms. In this article, we'll explore what third-party platforms are, how they can help you grow your business, areas of caution, and new developments to be aware of.

Third-party payment systems are platforms that enable businesses to accept and process payments. These systems act as intermediaries between the company and the customer, handling the payment processing and transferring the funds to the business's account. Some popular third-party payment systems include PayPal, Stripe, Square, and Google Wallet.

New opportunities for small businesses 

These providers have become increasingly popular in recent years due to the growth of e-commerce and the current on-demand trends in all commerce.  While the traditional big companies have benefited from payment apps, small business owners and side hustlers have also reaped the benefits. Not long ago, vendors at the local farmers market or art fair were restricted to cash transactions. But by leveraging third-party payment providers, these vendors and various small businesses have opened a new window of opportunity.

Advantages 

Utilizing payment platforms has many benefits:

Offer multiple payment options to your customers

• Payment can be made via credit cards, Venmo, Apple Pay, and more.

Drive revenue growth

• You can attract more customers by accepting multiple payment options, increasing sales.  

Improve cash flow

• Faster and more streamlined payment can improve your cash flow.

Enhance security

• A safer alternative than a pure cash business
• Features such as encryption and fraud protection can help protect your business and customers from fraud and other security threats.

Simplified tax reporting

• Payment processing companies must report the payments distributed to the payee on form 1099-K. Rather than having to track and report all payments individually, businesses can utilize the information provided on the 1099-K form. This can save business owners time and effort, particularly those who process a large volume of transactions.

Disadvantages

There are also a few downsides to using a third-party payment system:

Fees

• Third-party payment systems charge fees for their services, including transaction, monthly, and currency conversion fees.

Security risks

• Any system that handles sensitive financial information can be vulnerable to hacking and fraud.

And finally, one of the main drawbacks of using a payment platform is the 1099-K requirement. While the potential benefits are noted above, receiving a 1099-K could increase businesses' administrative burden. 

For example, businesses may need more time and resources to track and reconcile their payment transactions to match the information reported on the form. This can be particularly challenging for small businesses with limited resources. Additionally, new changes to these requirements will significantly affect just above everyone who makes a transaction using one of these providers; more about that is below.

When first introduced, 1099-K forms were only sent out if payments exceeded $20,000 and 200 transactions. This threshold ensured that people making an occasional sale, or generally not in the business of sales, were excluded. 

However, the American Rescue Plan of 2021 changed the reporting requirements from the numbers above to $600 and ANY number of transactions. Essentially requiring virtually anyone who uses these platforms to receive a 1099-K and report the information on their tax return. 

These changes were initially slated to go into effect for the 2022 reporting year, but the IRS delayed this to allow companies more time for compliance. Beginning in 2023, transactions meeting the threshold must be reported on 2023 returns.

Manage business payments and taxes

In some ways, third-party payment platforms may have made things a bit more complicated for small business owners, but the benefits can definitely be worth it. As commerce moves more and more toward cashless transactions, offering customers more payment options can help your business grow and keep your business competitive. 

As platforms continue to innovate, you can take payments anywhere you do business. You’re no longer limited to an e-commerce shop online. Third-party payment platforms can give your customers options at your brick-and-mortar store or if you’re traveling for a trade show. Researching your options for third-party payment platforms can help you choose the right option for your business, budget, and circumstances. 

And speaking of the 1099-K you’ll receive, you can use a tool like ComplYant to help manage your business taxes. A free account can help you save time and never miss a deadline. With a ComplYant and a solid third-party payment platform, you can make getting paid and reporting those payments to the IRS a little less complicated.