We mentioned in this eFile360 article that the 1099-K threshold is changing in 2022, now we want to dive into the details and talk about what that change means for individuals and businesses. Here’s the latest news on the new 1099-K rules.
1099-K Rules: New Threshold
Starting in the tax year 2022. The new 1099-K rules include a much lower threshold at which third-party payment entities will have to prepare and send out a Form 1099-K.
These third-party or “payment settlement entities” include businesses like banks and any other organization that processes credit card transactions on the behalf of another merchant and then makes interbank transfers of funds from a customer to the merchant.
This also includes third-party payment apps like PayPal, Venmo, Zelle, CashApp, Uber, and more.
Previously, the threshold required these entities to only send out a Form 1099-K if they handled more than 200 transactions during the calendar year with a total gross amount of more than $20,000.
But now, a section in the American Rescue Plan Act (ARPA) has amended these thresholds to $600 and no minimum transaction number, respectively. That means there will be a huge uptick in the number of 1099-K forms that these entities will be responsible for.
Exceptions to the New 1099-K Threshold
It’s important to note, however, that these transactions only count toward the new 1099-K threshold if they are “reportable third-party network transactions.” These reportable transactions include payments made for goods and services, not those made as personal gifts or reimbursements.
So, if you own a coffee shop and your customers pay through a third-party entity, those transactions (after the $600 threshold) will need to be included on your Form 1099-K, but that money you sent to your friend because they paid your half of the dinner tab last week is not reportable.
Cautions & Criticisms
It’s worth noting that if you or others in your life often use these third-party payment entities for business and personal charges, make sure you are designating which ones are personal so you don’t end up erroneously including them on your 1099-K. Many of these entities have a place for you to designate an expense as “non-business,” so it’s important that you keep the transactions organized so they don’t cause problems later.
There is also a fair amount of criticism for the new 1099-K rules. It looks to be an attempt from Congress to regulate the gig economy, but many are worried the drastic increase in the number of 1099-Ks that will have to be filed might also contribute to the huge backlog the IRS is currently working to get through.
There is also some concern about how the reportable and non-reportable transactions may evolve in classification. According to the Journal of Accountancy, some of this criticism is coming from the National Taxpayers Union Foundation (NTUF) and the Taxpayer Advocate Service (TAS).
These organizations have raised questions about “digital garage sales” – how do we classify items sold at a garage sale or online, like personal items or school textbooks? They currently fall under the non-reportable side of things, but there could soon be more changes to the way we file 1099-Ks.
How Should I Handle the Changes to the 1099-K Threshold?
If you are an independent contractor or you have a side business, it’s important to make sure that when you receive your 1099-K, you go through the information thoroughly. Tax forms are there to relay information, and if your business and personal transactions are run through an app like PayPal, what PayPal thinks is personal vs. business may not be true based on your use of the app.
Many of these third-party payment entities will have thousands more 1099-K forms to fill out for the tax year 2022, and they will make mistakes. It’s important, whether you are someone who uses an entity’s services, or you are the entity that provides these services, organization is key moving forward.
If you are worried that the latest changes to the 1099-K threshold will create confusion for you next year come tax time, eFile360 can help you start getting organized right now.
eFile360 is the most cost-effective way to e-file your information returns. If you went from having a handful of 1099-K forms to file in 2022 and you are looking at a considerable increase coming in tax season 2023, eFile360 is here to help.
Our system allows you to mail or e-file your information returns, and we also offer assistance with corrections filing, TIN checking, and Combined Federal and State Filing.
For help with your 2022 1099-K forms, sign up for a free eFile360 account today.