For taxpayers collecting payments through a third-party payment platform (such as PayPal), the American Rescue Plan Act (the “Act”) established a major change to tax reporting rules to prevent businesses and contractors from hiding income through the receipt of electronic payments. Form 1099-K is the tax form issued by credit card companies and third-party payment processors to report payments made via debit card, credit card, stored value cards (like gift cards), and payment apps (like Stripe, PayPal, or Venmo), and the reporting threshold for issuing the form was decreased significantly as part of the passing of the Act. Although this change was set to take effect starting with the 2022 tax year, the IRS has delayed implementation of the new rule – however, it is expected to be required for 2023.
What Changed?
Existing rules (which are still currently in place for 2022 due to the IRS postponement) require credit card companies and payment processors to file Form 1099-K with IRS and issue to payees when:
- gross earnings are more than $20,000, and
- the number of transactions exceeds 200 for the year
Many lawmakers argued that this “two-step” threshold created a situation where contractors/sellers could easily omit income from their tax returns. As a result, the single “$600 or more” threshold was created, meaning that any recipient with receipts of $600 or more for the year through a certain payment platform will be issued a 1099-K form, regardless of the number of transactions or other factors. Barring any additional action from Congress, this new reporting threshold will be enforced starting with 2023 forms, meaning that a substantially higher number of 1099-K forms will be sent out in early 2024 for the 2023 tax year.
Considerations and Concerns
Despite the fact that tax law has always required taxpayers to report ALL income earned/received, regardless of whether associated tax forms are received, this law change has raised concerns about several logistical challenges, including:
- What about personal transactions? For those taxpayers who use platforms like Venmo to receive personal payments, such as a birthday gift from a relative or a rent deposit from a roommate, will they be taxed on those payments? According to IRS, 1099-K forms will only be issued for those accounts that are listed as business or merchant accounts or on personal accounts where transactions are tagged as “goods and services.” Despite these reassurances, there are still questions about how this will play out as the change is implemented, especially for those who use the same account for business and personal transactions, or casual sellers who are selling used goods for less than what they paid/are not in the business of selling such goods for a profit.
- What if the 1099-K and 1099-NEC forms report the same payment? Although this should not happen per IRS due to the fact that payment processors are responsible for issuing 1099-K forms and individual clients are responsible for sending 1099-NEC forms, it’s still possible, particularly if clients misunderstand the rules and don’t realize they shouldn’t be issuing 1099s for payments made through credit card or payment apps. This raises concerns about the double-reporting of income and how to account for such errors on a tax return so that the recipient isn’t taxed twice on the same income.
- How will IRS handle the influx of paperwork they’ll have to sort through as a result? IRS has already been dealing with understaffing and, as a result, processing backlogs and inadequate phone support over the last few years. Many believe this compliance change will increase the burden on IRS and lead to widespread confusion in the tax system, and will also lead to a rise in IRS correspondence.
For freelancers, contractors, or anyone receiving payments through a third-party platform, make sure to save any 1099-K forms received, which you will need to refer to when you file your tax returns. Consult with your tax professional about any actions you may need to take as a result of these rule changes, and if/how your tax situation may be impacted.