What is a 1099-K
The 1099-K is an IRS information return used to report certain payment transactions to help the government track income. The form is generally filed by payment settlement entities (PSE) also referred to as third-party settlement organizations, i.e. gift cards, payment cards, PayPal, Zelle, Venmo, Stripe etc.*
Often these are payments made to freelancers, gig workers, sellers and resellers on sites such as Ebay and Etsy, those renting out homes on AirBnB, etc. However, they may also be made to businesses of all kinds that use third-party settlement organizations. Previously, many entities did not receive a 1099-K because they were only issued to those that received more than $20,000 and had 200 transactions or more.
The American Rescue Plan, passed in 2021, included a provision, starting in the tax year 2022, that changed the 1099-K reporting requirements These changes took place January 1, 2022 and were designed to close the so-called “information gap” and provide the IRS with better data to enforce tax laws.
Here’s what you need to know about the 1099-K changes for 2022:
The reporting threshold increased. Previously, third-party settlement businesses only had to file a 1099-K if they processed more than $20,000 in payments and 200 transactions per year for a given entity. For tax year 2022, the reporting threshold increased to $600 in gross payments per calendar year and is not dependent upon the number of transactions.
What to be aware of
The reporting is only intended for goods and services. It may be worthwhile to separate your accounts so only that items like reimbursement to friends, gifts, etc. do not get confused with payments made goods or services that you provided. If this isn’t possible, be sure to keep very good records so that you can separate goods and services provided from personal transactions at tax time.
Because the reporting is based on your social security number or your taxpayer identification number (TIN) you may want to go to irs.gov and get a TIN even if you are getting payments for something like short term rental through AirBnB. That way you will not have to use your social security number.
Who will be impacted the most?
Individuals that make extra money online and those that provide services such as babysitting, lawncare, short term rental, etc. and receive payments through apps like Zelle and Venmo may be surprised to receive a 1099-K in early 2023.
The information is sent to both the payee and the IRS, so you will need to report the information on your taxes. In some cases, you may also have to pay self-employment tax. It is important to talk to your accountant as early as possible to understand the tax implications of this new reporting so you are not surprised by a large tax bill or subject to any penalties.
If you have questions, please contact us.
IRS frequently asked questions regarding 1099-K: https://www.irs.gov/payments/general-faqs-on-new-payment-card-reporting-requirements
Instructions for 1099-K providers: https://www.irs.gov/pub/irs-pdf/i1099k.pdf
“A third party payment network is any agreement or arrangement that provides for the following:
• The establishment of accounts with a central organization by a substantial number of providers of goods or services who are unrelated to the organization and who have agreed to settle transactions for the provision of the goods or services to purchasers according to the terms of the agreement or arrangement.
• Standards and mechanisms for settling the transactions.
• Guarantee of payment to the persons providing goods or services (participating payees) in settlement of transactions with purchasers pursuant to the agreement or arrangement. A third party payment network does not include any agreement or arrangement that provides for the issuance of payment cards.”—IRS.gov, Instructions for Form 1099-K