President Biden signed the American Rescue Plan Act of 2021 which included a variety of provisions aimed at helping Americans get through the aftermath of the COVID-19 pandemic. To help fund this most recent round of aid, Section 9674 of the Act includes a change to the Form 1099-K reporting threshold for Third-Party Settlement Organizations (TPSOs).
Specifically, internal revenue code section 6050W(e) was amended to require TPSOs to report transactions following a $600 threshold with no transaction limit. That is, when TPSOs pay a single recipient at least $600 in the calendar year, they must issue Form 1099-K. Previously, TPSOs only needed to report when payments aggregated to $20k or more in the calendar year and when those payments were paid over 200 transactions.
Effective date for 1099-K threshold change
While the threshold change is clear, the effective date of the change is not. Specifically, the bill indicates that the change “shall apply to returns for calendar years beginning after December 31, 2021.” It seems so simple – but in practice, I’ve already received these two questions:
- Does this mean that the change is effective for returns filed after December 31, 2021? If so, this means that the Forms 1099-K for the 2021 calendar year are impacted.
- Does this mean that the change is effective for returns issued after December 31, 2021? If so, this means that the Forms 1099-K for the 2022 calendar year are impacted.
As I told Liz Farmer at Forbes, the budget analysis for the Act includes expected increases in tax revenue associated with this change for Fiscal Year 2022 which is the calendar year 2023. Therefore, I interpret the second scenario is correct – so returns issued for the 2022 calendar year that are filed in early 2023 are impacted.
I guess we’ll know for sure when the IRS releases follow-up communications.
Clarification that 1099-K reporting requirements only impact goods and services payments
Also included in Section 9674 of the Act is a clarification that TPSOs only need to report for transactions that represent goods and services. This language is intended to limit the reporting burden to specific transactions so that third-party payers of other taxable income do not report Form 1099-K unnecessarily. I believe that change is tied to details from the GAO report to congress last year. In that report, the GAO included recommendations to change the Form 1099-K reporting thresholds. But they also included carve-outs to help minimize reporting burdens for other payers including Payment-Only TPSOs.
Different effective date for the clarification
The effective date for the clarification that reporting only impacts goods and services payments is different than the effective date for the threshold change. Specifically, changes “shall apply to transactions after the date of the enactment of this Act.” Therefore, for example, TPSOs facilitating rents between tenants and landlords using an electronic platform would not be subject to the reporting requirements as the requirements are intended for goods and services transactions.
Consider the impacts to your organization
The GAO report indicated that approximately 75% of gig workers do not receive Forms 1099-K because their average earnings do not meet the reporting threshold. With this change, TPSOs of goods and services income will need to evaluate technology and processes. Significant increases in reportable payments may mean increased focus on payee onboarding and potential backup withholding processes, which are sure to receive more scrutiny from the IRS and state regulators. Organizations will require robust processes and solutions to seamlessly handle these expanded reporting requirements.
Download the Sovos sponsored IDC infobrief, ‘Tax Compliance has Entered the Spotlight’.