How Changes to Form 1099-K May Affect Small Business Owners, Gig Workers, and You
Form 1099-K has undergone a series of changes over the past couple of years, and with U.S. Senators introducing legislation that would again alter who has to file a 1099-K, it's once again back in the accounting and tax spotlight.
What is Form 1099-K?
Form 1099-K, Payment Card and Third Party Network Transactions reports certain payment transactions processed through "third-party settlement organizations," such as PayPal, Venmo, or Square.
The IRS defines "payment cards" as credit cards, debit cards, and "store-value cards," the last one primarily referring to gift cards. A third-party settlement organization is defined as the central organization that has the contractual obligation to make payments to participating payees of third-party network transactions.
Have you ever visited your local farmer's market or coffee shop and paid via a Square card reader on an iPad? If that business grossed over $20,000 and 200 transactions, your payment was likely part of a 1099-K.
The purpose of the form is to help ensure that all income received through third-party settlement organizations, like Square, is accurately reported on tax returns. The IRS claims that the form improves voluntary tax compliance.
Form 1099-K Changes Timeline
- In 2020, Form 1099-K wasn't issued unless an individual received payments whereby gross payments exceeded $20,000 and there were more than 200 transactions.
- As part of the American Rescue Plan of 2021, that threshold was to be dramatically reduced to $600 and any number of transactions.
- At the end of 2022, the IRS announced that they were delaying the new requirement from taking effect in 2022. Instead, 2023 would be treated as a transition year for the reduced threshold, to reduce confusion and give taxpayers more time to prepare.
Form 1099-K Threshold Reduction Fallout
With so many more Americans now engaging in side hustles, a reported 44% in 2022 according to a survey by LendingTree, this dramatic reduction in reporting threshold means a lot more people will be receiving Form 1099-K's which in turn will require the reporting of income that may have not been previously reported on tax returns.
It's also a lot more likely you sold a personal item for a gross payment of $600 or more, rather than $20,000. When the delayed changes go into effect, selling your prized Magic Johnson rookie card may be subject to the proceeds of a Form 1099-K filing with the IRS on your behalf by the third-party settlement organization. This will catch many taxpayers off-guard.
The threshold reduction was going to be so disruptive, a group of companies formed a coalition called 1099-K Fariness to lobby Congress to reduce Form 1099-K's threshold. The coalition included companies like AirBnB, EBay, EventBrite, Etsy, PayPal, Reverb, StubHub, amongst others. According to the group, 47% of casual sellers surveyed were unaware of the new reporting requirements.
Senators Propose Raising the Threshold
On May 18th, 2023 U.S. Senators Bill Cassidy, M.D. (R-LA) and Sherrod Brown (D-OH) introduced the cheekily named Red Tape Reduction Act, in an effort to address the concerns surrounding Form 1099-K.
Their legislation would raise the threshold from the currently delayed $600 threshold to $10,000. A compromise that would prevent it from becoming something most Americans would have to file.
“Ohio small businesses are frustrated with the 1099-K reporting threshold. This red tape hits small businesses and other Ohioans selling products online, sucking time and resources from the smallest online sellers,” said Brown, in the press release announcing the act. “By raising the threshold, we can prevent the IRS from interfering with minor transactions and cut down on excessive paperwork.”
“The cap the Biden administration implemented is hurting everyone from small business owners to people just trying to pay their rent. This bill lifts that cap and prevents the IRS from spying on American taxpayers," Dr. Cassidy added in the press release.
Whether the final 1099-K threshold becomes $600, $20,000, or somewhere in between—MRPR is available to help you navigate and prepare your taxes, accounting, and business to ensure your finances are in order.