The IRS has recently updated the Form 1099-K guidelines. Here’s what you need to know about how this will affect your online transactions and beyond.
1099-K Changes & How They Affect Everyone
Much of the conversation that has been circulating about the new 1099-K thresholds for third-party and online transactions has focused on the impact on the smallest of small businesses. Previously, side hustles and other micro-business ventures were not getting anywhere close to the old $20,000-and-200-transaction minimum used to determine who got these forms and who didn’t.
As we’ve mentioned before, the threshold is now set at just $600 – so if any third-party or online transaction (related to business, not personal exchanges) totals reach more than that, the recipient of those funds will need to also get a 1099-K to file with their taxes.
These new thresholds are going to generate a tidal wave of new 1099-K filings come tax season 2023. While personal payments don’t count towards these thresholds, we can expect some issues to arise, as freelancers, entrepreneurs, friends, family, and corporate accounts are all coalescing within these apps to pay for everything from your portion of the brunch bill to a company retreat or contractor fees.
Who Is Responsible for Filing 1099-K?
There is also a bit of confusion about which entities and individuals will have to prepare and file all of these new 1099-K forms.
You can rest a little easier knowing that your business (or your personal tax preparer) isn’t responsible for generating these forms. The entities that facilitated the online transactions (or third-party settlement organizations like Venmo, Paypal, etc.) are the ones who must send them to the payee, which is the business or individual that received the funds.
Because this is going to be a new and greatly expanded process for these entities, it’s even more important that you and your accounting or tax professionals look over these forms carefully. There are millions of people using these payment portals every day, for everything from business to pleasure and everything in between.
Third-Party Vendor Transaction Best Practices
Business and financial best practices have always been built on the idea that you don’t mix business with personal – everyone who is a stakeholder or owner of a business knows your business accounts and your personal ones should never mingle. This is the basis for things like corporate accounts, company credit cards, and the like.
But what happens when the freelance market is booming and you’re working in (or doing business with) a single individual who just happens to have a lucrative side hustle or a website with PayPal as a form of payment? Many of these situations can lead to confusion when it comes time to file your taxes.
Even though the third-party payment processors (the ones facilitating the online transactions) are responsible for sending you that 1099-K, they aren’t going to know whether that $60 restaurant charge from May 5, 2022, was for a client meeting or a brunch date with your book club.
Because business transactions are the only ones that “count” toward your 1099-K, your spending records will have to be sorted well to ensure that you aren’t paying taxes on online transactions that shouldn’t be taxed.
Creating a tax plan for your investments, income, and personal savings can help alleviate some of the tax season headaches, but your organization of these statements will have to be very intentional.
In much the same way that you have to itemize receipts from business trips in order to get reimbursed, you’ll likely have to keep that same close eye on your PayPal or Venmo transactions. Make sure you can account for each transaction and note whether it was for business or “Friends and family.” You could receive a 1099-K in 2023 even if you don’t have a business, depending on how you use these third-party payment processors.
If you think you have non-income that is being taxed in error, we encourage you to reach out to your preferred tax professionals to see how to best remedy the situation.
1099 Filing Made Easy
Each of the 21 variations of Form 1099 (including 1099-K) creates a lot of work come tax time. eFile360 is designed to help with fast and easy solutions for your information return filing and organization.
With the rise of freelance work and the changes to the reporting process for online transactions – you have better things to do than to constantly check the IRS website for the latest and greatest updates to the US tax code. That’s where we come in – eFile360 is here to help streamline your information return processing and make every tax season a little less hectic than the last.
To learn more, check out how eFile360 works for you and your business.
For quick and easy organization and filing out of your increased number of 1099-K forms, sign up for a free eFile360 account today.