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1099-K Reporting Changes

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: 

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:

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.

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