Does your business process transactions through vendors such as Venmo, Zelle, or Shopify? Under a revised law, the Internal Revenue Service (IRS) has implemented new Form 1099-K requirements for the 2023 tax filing year that may impact you.
Beginning January 1, 2023, all third-party settlement organizations (TPSOs) are required to report third-party network transactions paid in 2023 to any participating payee that exceed a minimum threshold of $600 in aggregate payments, with no minimum transaction threshold. TPSOs (vendors such as, but not limited to, Cash App, PayPal, Shopify, Venmo, Zelle, etc.) are required to report these transactions by providing IRS Form 1099-K, Payment Card, and Third-Party Network Transactions to each business or individual payee. The new threshold for Form 1099-K reporting is designed to help the IRS track income more accurately and reduce the risk of under-reporting. In this article we will discuss what the Form 1099-K is, why it matters, and the new requirements for the 2023 tax filing year.
Q: What exactly is Form 1099-K, and why does it matter?
A: Form 1099-K is a tax reporting form businesses and individuals may receive from third-party payment networks, such as PayPal or Venmo, reporting the total amount of payments received by the payee via that payment processing service during the tax year. The purpose of the form is to assist both the payee and the IRS in tracking potentially taxable income. (It is important to note here that Form 1099-K is not a tax bill but a report of income that is provided to the IRS and payee.)
Q: What has changed about 1099-K reporting requirements?
Previously, for tax years prior to 2023, the threshold for filing Form 1099-K was two-pronged, comprised of BOTH 1) more than 200 reportable transactions per year AND 2) exceeding an aggregate amount of $20,000 for the year, per taxpayer ID. This was a moderately high bar to meet, allowing most small taxpayers to fall outside the bounds of the reporting requirement.
Now, under section 6050W(e) of The American Rescue Plan of 2021 (ARP), enacted on March 11, 2021, the reporting threshold for TPSOs changed to a minimum threshold of only $600 per payee, initially set to be effective for calendar years beginning after December 31, 2021. However, after an outcry from both the public and private sectors, Notice 2023-10 was released on December 23, 2022, giving a temporary reprieve to entities required to file and provide Form 1099-K, postponing the effective date one year; now effective for calendar years beginning after December 31, 2022. Thus, beginning January 1, 2023, much more substantial record-keeping and reporting requirements are in play for all U.S. taxpayers who facilitate and/or receive third party electronic payments of any kind.
Q: What information is required to be reported to the IRS on Form 1099-K?
A: Under §6050W(a), the annual information return (Form 1099-K) must include:
- The name, address, and taxpayer identification number (TIN) of each participating payee to whom payments were made, and
- The gross amount* of the reportable payment transactions with respect to that payee.
*(Section 1.6050W-1(a)(6) defines “gross amount” to mean the total dollar amount of the aggregate reportable payment transactions for each participating payee, without regard to any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts, or any other amounts.)
Q: When is the due date for Form 1099-K return, for either a payer or payee, if one is required?
A: Form 1099-K returns must be furnished to the participating payees on or before January 31st of the year following the calendar year for which the return was made. Reporting entities must file Forms 1099-K with the IRS on or before February 28th (March 31st if filing electronically) of the year following the calendar year for which the return was made.
Q: So, what does this new reporting requirement mean for small business owners, contractors, and freelancers (such as gig-economy workers)?
A: The new Form 1099-K requirements may create additional challenges for small business owners, contractors, and freelancers who rely on third-party payment networks to receive payments. As previously noted, until recently, the threshold for receiving a Form 1099-K was quite high. PSEs or third-party networks were only required to file a 1099-K form if they processed more than $20,000 in gross payments and more than 200 individual transactions during the tax year. However, the new IRS rules lowered the threshold for issuing a Form 1099-K significantly for the 2023 tax year, to only $600 in gross payments.
Small business owners, contractors, and freelancers will need to keep a closer eye on their income streams, keep track of payments received from each individual payment platform, and ensure that they report all income accurately. Since the threshold for issuing a Form 1099-K has been significantly lowered, even businesses and individuals who receive small payments totaling $600 or more during the tax year will receive a Form 1099-K. This means that they will need to be more diligent in tracking their payments and reconciling them against the amounts reported on their Forms 1099-K. Failure to report all taxable income accurately could result in penalties and fines from the IRS. Form 1099-K will assist them in accomplishing this reporting task.
Q: What does this new reporting requirement mean for me as a “regular” individual?
A: This new law is not intended to track personal transactions, such as using Venmo to share the cost of a car ride or meal, sending a Cash App payment for a grandchild’s birthday or holiday gift, or reimbursing a family member or roommate for household bills through PayPal. (More commonly referred to as the “friends and family exclusion.”) The new law is primarily intended to capture “commercial” transactions, either individually or in aggregate, per payee.
Keep in mind that the new law applies to digital payments received for online sales made by individuals for personal goods and services, such as sales through online auction sites or marketplace ad sales, and payments received for teaching piano lessons, babysitting, or mowing a lawn. Despite the intent of the law, any one of these types of transactions, even though not necessarily “commercial” in nature, may spawn the generation of a Form 1099-K, which will be received after January 31 of the following year.
Q: If I receive a Form 1099-K for 2023 will I owe tax on the full amount reported on the form?
A: This is a great question, and the answer, like the answer to most accounting questions, is…. maybe!
Form 1099-K can be issued for a multitude of different payment types, if payments are paid through a third-party payment service and total $600 or more in aggregate for the tax year. The fact that you receive a Form 1099-K does not automatically mean that you will owe taxes on the full amount reported to you. Form 1099-K is simply a report of the total payments received by the payment settlement entity or third-party network. Keep in mind, though, the form does not consider any deductions or expenses related to the proceeds reported, so it is important to keep track of any relevant deductions or expenses, basis of items sold, etc., to minimize your tax liability and accurately report taxable income on your tax return. You will only owe tax on the net income earned after deducting any allowable expenses related to the gross receipts reported on Form 1099-K.
Q: I heard from a friend on my favorite social media platform that the Form 1099-K filing requirements might be revised again soon. Is that true, and if so, do I still need to report any amounts on Forms 1099-K I receive in 2023?
A: First of all, you should not believe everything you read on the internet! However, there is a thread of truth to this rumor. In reality, there are a couple of bills that have been introduced in early 2023: one each in both the United States House of Representatives and the United States Senate, which if passed, would partially repeal the ARP rules which reduced the Form 1099-K filing threshold to $600.
- On January 10, 2023, West Virginia Congresswoman Carol Miller (R) announced she was re-introducing H.R. 190, titled “the Saving Gig Economy Taxpayers Act,” which would partially repeal ARP’s lower $600 Form 1099-K reporting level and reinstate the previous two-pronged threshold standards of $20,000 and 200 separate transactions. As of the date of this article, this bill is sitting with the House Ways and Means Committee awaiting further action.
- In mid-May 2023, Louisiana Senator Bill Cassidy (R) and Ohio Senator Sherrod Brown (D) introduced a bi-partisan bill titled “the Red Tape Reduction Act,” which as of the date of this article has not yet been assigned a bill number.
Both of these proposed legislation pieces are intended to ensure fewer small businesses and casual sellers receive excessive paperwork related to their online sales activity and decrease the strain of excess paperwork on the IRS as well. Despite these new proposals, however, we are stuck with the actual legislation which has already passed and made it into law, which requires all payments greater than or equal to $600 in total to be reported on Form 1099-K.
So, YES, at this point in time, you still need to include all 2023 amounts reported to you on Form 1099-K on your 2023 income tax return! Stay tuned for any changes though!
Please send us an email if you have any questions regarding the Form 1099-K reporting process and requirements. If you happen to receive a Form 1099-K and are curious about your responsibilities related to that form, our tax team is available to help you and explain what next steps need to be taken. We look forward to speaking with you and guiding you through this new process.
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