For the first time in state history, the Illinois state legislature has enacted form 1099-K reporting requirements as part of the FY20 Budget Implementation Act.
This change is a new direct state reporting requirement for payers of income made to Illinois residents.
- For 2019 reporting, Illinois requires form 1099-K reporting to be submitted to them directly, following the federal thresholds for reporting.
- For 2020 reporting, Illinois requires form 1099-K reporting to be submitted to them directly, when over$1,000 has been paid over at least 4 transactions.
About Form 1099-K
Form 1099-K reporting is used by credit card processors and third party processors to report the gross amounts of goods and services transacting between buyers and sellers.
When section 6050W was enacted to require the reporting of form 1099-K, third party processors, also known as Third-Party Settlement Organizations (TPSOs) were provided significant reporting relief because form 1099 was only required when the aggregate of payments made to a single recipient was at least $20k. And those amounts had to be paid over 200 or more transactions in a calendar year. Credit card processors, on the other hand, were not afforded the same reprieve and reported on all amounts transacted.
Since then, electronic transactions have significantly increased. No longer are consumers limited to buying goods and services on eBay and paying through PayPal. Now, we can buy services from Uber, or freelance services from Upwork and pay for them through an app on our mobile devices. The tremendous increase in electronic platforms transacting taxable income coupled with the threshold and transaction limits for form 1099-K reporting has translated into a large number of taxpayers not receiving form 1099-K according to a report released earlier this year by the Treasury Inspector General for Tax Administration (TIGTA).The IRS tax gap studies indicate that 63 percent of income is misreported when third parties do not provide a form 1099 to the IRS. So, when applying that figure to the underreported amounts from just the payers analyzed in the report, TIGTA estimated it could have been $3.7 billion of misreported income.
Illinois & Others Change 1099-K Reporting Requirements
A number of states enacted or are contemplating legislation to reduce the threshold and transaction limits for form 1099-K reporting by third party processors.
- Vermont eliminated the transaction threshold altogether and reduced the reporting threshold to align with form 1099-MISC at $600. The state estimated that they could bring in an additional $1.5M in revenue as a result of the change.
- Massachusetts enacted an identical bill, estimating an additional $20M in revenue.
- New Jersey requires the form to be reported at a $1k threshold with no transaction limits.
- Arkansas requires the form to be reported at a $2,500 threshold and no transaction limits.
- Pennsylvania introduced a bill to reduce the threshold to $5k and eliminate the transaction limit altogether.
- Washington DC, updated their list of 1099 forms that needed to be reported at a $600 threshold to include the K.
- California proposed AB 1791 which would eliminate the transaction threshold and require 1099-K reporting at a $600 threshold.
States Aren’t the Only Ones with a Threshold Problem
As mentioned previously, TIGTA released a report earlier this year. While the scope of the audit was intended to focus on compliance with self-employment taxes, TIGTA quickly realized that the threshold and transaction limits for form 1099-K reporting between payers who classify as TPSOs versus payers who classify as Payment Settlement Entities was a significant contributor to the overall tax gap.
One of the eleven findings in the report was a recommendation to the IRS to “work with the Treasury Office of Tax Policy to pursue regulatory or legislative change relating to the third-party reporting thresholds established in IRC 6050W”. And the IRS agreed.
In addition to the TIGTA report and other organizations recommending a lower threshold, there have been numerous bills introduced to Congress over the past couple of years that would lower this threshold. Currently, the New Gig Act of 2019, which sits in both the Senate and House, would lower the 1099-K reporting threshold to $1000 with no transaction requirement.
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