Beginning in January 2023 for 2022 tax return filings, third-party payment settlement organizations (Venmo, PayPal, Cash App, credit card terminals, etc.) will be required to report payments of $600 or more to the IRS and send the taxpayer a Form 1099-K. This new threshold is much lower than the previous one when payments had to be >= $20,000 and at least 200 transactions for the year.
Why the Change?
- IRS desires to increase tax compliance and reporting of income. There was an influx of workers who joined the ‘gig economy’ (Uber, food delivery services, etc.) during the COVID-19 Pandemic. Many of these workers did not receive a Form 1099-K and under reported their income.
What Do I Do to Keep in Compliance?
- Ensure your 1099-K reports your business EIN and business name, as it is shown on your federal tax return.
- Separate business accounts from personal and do not comingle transactions.
- Keep diligent records as to the “who” and “what” on the third-party settlement transactions as well as any cash-back to customers.
- Provide all 1099-K forms you receive to your tax advisor. Failure to report on your tax return, could result in an IRS notice of deficiency.
- Avoid sharing credit card terminals with another person or business since the 1099-K will include all transactions.
What Should I Do if I Receive a 1099-K in Error or with Incorrect Information?
- Contact the filer of the 1099-K to correct and reissue the form.
- Notify your tax advisor so they can be aware of any issues when filing your tax return.
Other Important Notes
- You do not have to have a business entity or sole proprietorship to be subject to the new reporting requirements. If you sell personal property (old furniture for example) and it is marked as “goods” in the payment organization, you may receive a 1099-K if the amount was $600 or more. This does not produce taxable income provided you are selling the item for less than the original cost; however, you must still report the transaction on your tax return since the IRS will have received the 1099-K information.
- Many of these third-party payment organizations are preparing ahead of time for the new filing requirements. Research your payment organization’s website to see what they are doing to make tracking transactions easier for you.