As the online platform economy has evolved, the related tax reporting requirements are also changing and becoming more intricate for businesses. With Form 1099-K reporting, organizations must ensure that they are up to date on all IRS and state tax regulations to stay in compliance.
Form 1099-K is not necessarily a requirement for all businesses – only for those that facilitate payment card transactions or third-party network transactions (e.g., PayPal or Venmo). Additionally, 1099-Ks allow the U.S. government to track online sales completed by retailers. The 1099-K form information helps the IRS ensure that online retailers are properly reporting all types of income for tax purposes. Third-party processors and credit card companies are required to report the payment transactions they process on behalf of retailers.
What’s changing for tax year 2022?
For 2022 returns, the American Rescue Plan Act (ARPA) changed the required reporting thresholds for some filers of Form 1099-K. Up until 2022, a third-party settlement organization (TPSO) was required to report Form 1099-K when the aggregate of payments paid to a payee in the calendar year was $20,000 and those payments were paid over 200 transactions. For 2022 returns and beyond, a TPSO must file Form 1099-K when the aggregate of payments paid to a payee in the calendar year is $600 and there is no transaction limit.
These changes align the Form 1099-K reporting thresholds with other 1099s that report non-employee compensation income, including Form 1099-NEC Nonemployee Compensation and Form 1099-MISC Miscellaneous Information.
Additionally, ARPA clarified that Form 1099-K reporting by TPSOs is for goods and services transactions. Electronic platforms that facilitate charitable donations or cryptocurrency exchanges for example, should not report Form 1099-K.
Who is impacted?
The Form 1099-K reporting changes will affect TPSOs of all kinds – gig economy payers (e.g., Uber, Lyft), platform marketplaces (e.g., Etsy, Facebook) and other companies that facilitate goods and services payments through electronic platforms (e.g., PayPal). Payment settlement entities (PSEs) that facilitate payment card transactions will not be affected because they were already required to report all amounts and transactions.
What are implications of the 1099-K reporting changes?
Most implications will be felt by those working in the gig economy or working as freelancers. This can include rideshare drivers, individuals selling crafts on platform marketplaces or even independent contractors. The rise of the gig economy helped to spur this reporting threshold change – for example, the summer of 2020 saw 24% more people entering the gig economy than in previous years, according to an Upwork study. These workers are not accustomed to receiving Form 1099-K and may not know how to properly include the income on their annual income tax return.
Although charitable donation payments are not reportable, crowdfunding payments may be impacted by the 1099-K reporting update. As we discussed in an earlier blog, payment processors that facilitate crowdfunding payments are obligated to report Form 1099-K when they make distributions of crowdfunding amounts that aggregate to $600 or more when campaign contributors receive goods and/or services in exchange for their donations.
- TPSOs will be affected by the lowered payment threshold, likely resulting in 50 – 100% more Forms 1099-K needing to be issued. Manual reporting processes previously utilized may no longer be scalable with the increased workload associated with issuing more forms.
- Additionally, an increase in form volumes means more name and TIN combinations to manage. TPSOs will need a way to verify name and TIN combinations quickly in order to avoid Backup Withholding notices and the related penalties.
- These reporting threshold changes align the Form 1099-K with the Form 1099-NEC and Form 1099-MISC that also report non-employee compensation income.
Best practices to prepare for the 1099-K
Here are some key ways to ensure compliance, even with evolving tax information reporting requirements:
- Collect a Form W-9: while not a legal requirement, it can be beneficial for ensuring accurate information is collected.
- Verify taxpayer identification numbers (TINs) via TIN matching solutions.
- Ensure your 1099 process and technology can scale to meet the new form volumes expected to be produced for the 2022 tax year
- Issue 1099-K forms electronically to minimize costs of printing and mailing so many more forms.
- Be ready to answer questions from recipients about the 1099-K (e.g., What education will first-time recipients need? Can your business handle the expected service volumes?)
- Make sure you do not skimp on state reporting obligations – state tax reporting for Form 1099-K has been required at lower thresholds for many years.
These Form 1099-K reporting updates are not the first changes made to annual tax reporting that businesses must adhere to – and they will likely not be the last. Working with the right partner can help the process remain seamless and keep your organization compliant.
Watch our webinar Best Practices for Addressing New 1099-K Reporting Requirements to learn more about the impacts of 1099-K.