New 1099-K Reporting Requirements
By: Erin Alderson, EA - Client Service Manager
We can all agree that life looks a little different in a post-COVID world. Even though many of us were already using electronic payments pre-COVID, there is an increased focus toward contactless payment options from several retailers. Many of us who use electronic payments for selling goods and services, and even reimbursing our friends and family for miscellaneous personal expenses, may be in for a rude awakening when tax time rolls around next January due to a change in rules for issuing Form 1099-K.
If you are self-employed or an independent contractor and you accept electronic payments for your goods and/or services, you will more than likely receive a 1099-K in January of 2023. This form reports to the IRS the amount of money received electronically by an individual, or a business, from third-party network and payment card transactions such as PayPal, Venmo, Square, Stripe, etc.
Form 1099-K is not new, but prior to 2022 these forms were only issued if the number of transactions in a year exceeded 200 and the total dollar amount paid out was more than $20,000. The IRS now feels those reporting limitations created loopholes for dishonest taxpayers to underreport their income and pay less tax on their tax returns. After the American Rescue Plan Act of 2021 was signed into law, these reporting restrictions were lowered from $20,000 to only $600. This lowered amount applies to all individuals and businesses, even for some personal payments. For example, if you are a season ticket holder to your favorite sports team and you occasionally sell tickets through Ticketmaster for more than $600 during the year, you will receive a 1099-K.
While forms 1099-K get reported to the IRS, this may not have a negative impact your tax return. For instance: If you sell some personal items online a few times a year, you won’t have to pay tax on the money you received, unless you made a profit from each sale. As an example, if you bought a piece of furniture for $750 and you subsequently sell it to your neighbor through PayPal for $650, the IRS will see you received $650. When you file your tax return, you will report the $650 as other income and then report the cost of the furniture, $750, which nets to a negative $100. You won’t get to write off the $100, but you also won’t have to pay tax on the $650 you received. If you sell an item for more than you originally paid, you will pay tax on the amount of profit. As in the example above, if you sell a piece of furniture for $800 but you bought it for $600, you will pay tax on your $200 profit.
Some third-party payment vendors, such as PayPal and Venmo, allow you to mark a transaction as “friends and family” so these payments won’t get reported on Form 1099-K. These types of payments include reimbursing a friend for your portion of a meal, your half of the rent, etc. Anything else that isn’t marked “friends or family” must be marked “goods and services” so the correct amount will be reported on Form 1099-K. PayPal and Venmo will monitor these classifications to ensure customers aren’t selling goods but marking them “friends and family” to avoid reporting.
If you are a business owner, nothing will really change on your tax return. You will continue to report your gross income either on Schedule C, Form 1120S, Form 1120 or Form 1065.
Do keep detailed records during the year, whether you are a business owner or an occasional seller of personal items. If you find discrepancies on your Form 1099-K, be sure to contact the third party payor immediately to get it corrected.
As always, if you have questions or concerns, please reach out to one of our team members to discuss.