As the online platform economy has evolved, the related tax reporting requirements are also changing and becoming more intricate for businesses. With Form 1099-K reporting, organizations must ensure that they are up to date on all IRS and state tax regulations to stay in compliance.
Form 1099-K is not necessarily a requirement for all businesses – only for those that facilitate payment card transactions or third-party network transactions (e.g., PayPal, Zelle, or Venmo). Additionally, 1099-Ks allow the U.S. government to track online sales completed by retailers. The 1099-K form information helps the IRS ensure that online retailers are properly reporting all types of income for tax purposes. Third-party processors and credit card companies are required to report the payment transactions they process on behalf of retailers.
What’s changing for tax year 2022?
For 2022 returns, the American Rescue Plan Act (ARPA) changed the required reporting thresholds for some filers of Form 1099-K. Up until 2022, a third-party settlement organization (TPSO) was required to report Form 1099-K when the aggregate of payments paid to a payee in the calendar year was $20,000 and those payments were paid over 200 transactions. For 2022 returns and beyond, a TPSO must file Form 1099-K when the aggregate of payments paid to a payee in the calendar year is $600 and there is no transaction limit.
These changes align the Form 1099-K reporting thresholds with other 1099s that report non-employee compensation income, including non-employee compensation income, including Form 1099-NEC Nonemployee Compensation and Form 1099-MISC Miscellaneous Information.
Additionally, The American Rescue Plan Act of 2021 (ARPA) clarified that Form 1099-K reporting by third-party settlement organizations (“TPSOs”) is for goods and services transactions. Electronic platforms that facilitate charitable donations or cryptocurrency exchanges for example, should not report Form 1099-K.
Who is impacted?
The Form 1099-K reporting changes will affect TPSOs of all kinds – gig economy payers (e.g., Uber, Lyft), platform marketplaces (e.g., Etsy, Facebook) and other companies that facilitate goods and services payments through electronic platforms (e.g., PayPal). Payment settlement entities (PSEs) that facilitate payment card transactions will not be affected because they were already required to report all amounts and transactions.
There are many ways that someone may receive a Form 1099-K for 2022 (and onward), such as when a taxpayer:
Received money from friends or family via payment applications which were not designated as personal
Sold personal household items online
Sold items related to a hobby
Worked for an app-based vendor such as Uber or DoorDash
There may also be circumstances where the taxpayer believes the Form 1099-K has been issued incorrectly.
It is important to note that whether any payments received constitute taxable income has not changed. For example, income received from a hobby is taxable income and the sale of an item owned for personal use is taxable as a capital gain. Reimbursements of expenses are not generally considered taxable income.
What are implications of the 1099-K reporting changes?
Most implications will be felt by those working in the gig economy or working as freelancers. This can include rideshare drivers, individuals selling crafts on platform marketplaces or even independent contractors. The rise of the gig economy helped to spur this reporting threshold change – for example, the summer of 2020 saw 24% more people entering the gig economy than in previous years, according to an Upwork study. These workers are not accustomed to receiving Form 1099-K and may not know how to properly include the income on their annual income tax return.
Although charitable donation payments are not reportable, crowdfunding payments may be impacted by the 1099-K reporting update.
Frequently asked questions (FAQs) and examples
The IRS has released FAQs to help taxpayers and tax professionals understand the form and new requirements.
For example, if a taxpayer sells a ticket to a sporting event that is more than $600 and is paid through a third-party settlement organization, they will likely receive a Form 1099-K. Similarly, if a taxpayer sells personal belongings such as a car, a refrigerator or furniture, they will report the gain (the sales price less the cost acquired) as taxable personal gain. If personal-use items are sold for a loss, the loss is not deductible. In addition, loss transactions cannot be netted into gain transactions.
If a taxpayer uses an online application to transfer money to a friend or family member (e.g., for splitting the cost of an expense) generally, they should not receive a Form 1099-K. Third-party payment services, such as PayPal and Venmo, allow users to code transactions according to the type of transaction. If a personal transaction is properly categorized, it should not trigger the issuance of a Form 1099-K.
Challenges associated with the new requirements are foreseeable. The reduction of the reporting threshold for third-party network transactions will create significantly more reporting requirements for many third-party settlement organizations and electronic payment facilitators. Associated with the increase in information reporting requirements is the potential for increased penalties since many taxpayers could receive a Form 1099-K without realizing they have a filing requirement and could owe taxes.
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