Updates to Form 1099-K May Result in Tax Time Confusion
What the 1099-K Changes Mean to Business Owners
Does your business receive customer payments from third-party apps like PayPal, Square or Venmo? Companies that process sales through third-party networks may receive additional 1099’s for tax year 2022 for the gross amount of the payments made to them during the calendar year.
Prior to the American Rescue Plan of 2021, third-party networks and other payment processors were only required to file form 1099-K if total payments exceeded $20,000 and the number of transactions processed exceeded 200. Under new provisions of the act, that $20,000 threshold has been reduced to $600. This decreased threshold will increase the reporting requirements for third-party processors.
Businesses need to be careful when reporting their income.
What is form 1099-K?
Form 1099-K reports transactions made via payment settlement entities such as Venmo. They fill out the 1099-K and send copies to the IRS, state and person receiving the payments. The goal is to ensure people report their business income on their tax returns.
When is the change effective?
In late December, the House was in session voting on the Omnibus spending bill and the IRS announced it would delay the filing date of Form 1099-K for the 2022 year. The IRS released Notice 2023-10 that addresses this delay.
Who can expect to receive a 1099-K?
Currently, payment card processors or networks issue 1099-K’s to individuals or businesses for transactions over $600. If your business processes customer payments through any third-party network or card processor, you will likely receive a 1099-K from that processor. Individuals that receive compensation for gig-economy jobs, such as through Uber or Lyft, may receive a 1099-K for work they have performed. Other common reasons for receiving a 1099-K include selling items online, such as through online marketplaces like eBay.
Note: The tax treatment of payments received for non-personal receipts from these third-party pay platforms has stayed the same. Payments received as personal gifts from friends or relatives through third-party processors are generally not taxable. Payments received as reimbursement for personal expenses are not taxable. However, you may receive a 1099-K regardless of whether the amount is taxable or not.
Is there relief coming from these new rules?
In an attempt to stop the flood of 1099-Ks that will be issued and potentially causing confusion to taxpayers and increased compliance costs, some in Congress are acting. Legislation has been proposed to restore the $20,000 threshold, but as of December 2022, action has yet to be taken.
How should businesses prepare for these new requirements?
- It will be increasingly important to keep track of payments you receive and what they are for, as amounts reported on a 1099-K may be taxable or nontaxable.
- Document any deductible expenses connected to the reported income. These should be tracked separately from the payments you receive.
- Separate gross receipts received through payment settlement entities that are income from personal payments. We recommend maintaining separate accounts for personal expenses and business expenses since third-party apps cannot distinguish between the two.
Need assistance preparing for this change? Contact an Adams Brown advisor if you have questions about your 1099-K responsibilities.