2023 IRS Changes to Tax Form 1099-K
What the lower threshold reporting requirement means, and how it will impact individuals and businesses.
Attention personal and business tax filers! The IRS has implemented changes to the reporting requirements of the 1099-K form, and consequently many taxpayers will be receiving a copy of this form for the first time. Many of us may start to feel anxiety when we receive a new tax form in the mail, but there is no need to worry. The tax professionals at JCCS are here to help you understand and prepare for these tax reporting changes.
What is a 1099-K?
The 1099-K tax form is used to help individuals and businesses report the correct amount of income from goods and services that total $600 or more annually and were paid for through a third-party settlement organization. This form is meant to be informational for the taxpayer to determine how much money they received from a third-party settlement organization.
Who must file a 1099-K?
The process of issuing a 1099-K is not on the individual or business owner as they are the recipients of the 1099-K. Those who must issue a 1099-K are payment settlement entities, which are organizations that report payments made to payees. There are two different categories of payment settlement entities: third-party settlement entities and merchant acquiring entities. Third-party settlement organizations are intermediaries between a payee and the provider of the goods or services being purchased.
Third-party payment settlement organizations include the following:
- Payment exchange apps (Venmo/PayPal, Zelle, Cash App)
- Auction or marketplace services (eBay, Amazon)
- Gig economy platforms (Airbnb, VRBO, Uber)
Merchant acquiring entities include the following:
- Banks
- Credit card companies
Note: Automated clearinghouses do not qualify as third-party settlement organizations. Therefore, transactions done through a clearinghouse will not be included in 1099-K reporting.
What are the reporting changes for the 1099-K?
The American Rescue Plan of 2021 created new changes to the requirements for filing a 1099-K. Starting in the 2023 calendar year, individuals or business owners who received $600 or more per year as payment for goods and/or services through one of the entities listed above will be issued a 1099-K. Activity includes any type of business exchange for goods or services being provided, including selling personal items at a gain.
The IRS’ intention behind issuing a 1099-K is to help improve voluntary tax compliance, especially for those who use the above-mentioned third-party payment organizations for business transactions. With so many individuals and businesses using these third-party services as a way of receiving income, the IRS wants to ensure those companies do their due diligence to provide this information to taxpayers.
The old requirement for reporting and filing a 1099-K required an individual or business to conduct more than 200 transactions in a calendar year and equal more than $20,000. This previous requirement for filing was only necessary when BOTH the dollar amount and the specific number of transactions met the threshold.
How does the $600 filing threshold work?
Individuals and businesses will be issued 1099-K’s if they receive over $600 during the year using one of the mentioned entities for business purposes. The threshold is tracked on a per-platform basis. For example, if you were to sell $800 worth of goods through eBay, $700 through Etsy, and $400 through PayPal, you would only be issued 1099-K’s from eBay and Etsy. PayPal would not issue a 1099-K because the filing threshold was not met.
Generally speaking, taxpayers who use these services for business purposes will receive a 1099-K form and can use the 1099-K form as documentation indicating how much money they received from a certain platform. We strongly suggest that individuals using these platforms would be smart to carefully separate or track their business transactions versus their personal transactions.
With this filing threshold being significantly lowered, this will ultimately cause confusion and extra work for those third-party payment organizations, which could create more questions from individuals who may receive a 1099-K in error due to these compliance changes. Ideally, 1099-K’s should only be issued to individuals who use these platforms for business purposes only. However, if an individual were to receive a 1099-K when they only used it for personal use, the individual should contact the filer of the 1099-K form to have it corrected. If the correction does not take place, please consult your tax advisor on how to properly handle the amount reported.
When are the changes taking place?
Per IRS Notice 2023-10, the new changes will be required for 2023 tax year returns and any tax years going forward. For tax years 2022 and older, the old requirement will apply.
When can I expect to receive a 1099-K?
The filing deadline for third-party settlement organizations to send 1099-K’s is January 31. Depending on the delivery method, we would expect most people to receive their copies in the first week of February at the latest.
What if I am paying someone back for an item and/or service (gas, a meal, etc.)?
If you are paying back the cost of goods and/or services, these are considered reimbursements, which are not reportable income. If there is no gain or loss in the reimbursements, then there will be no 1099-K. Again, it is important that anyone using these services for both business and personal money transfers to carefully and diligently track which payments are which.
What if I sold personal property online and received payment via Venmo or PayPal?
If you use a third-party settlement organization to complete a transaction and you receive $600 or more worth of income, then you will receive a 1099-K. However, along with reporting the income from the 1099-K, you will also be able to report the cost of the goods and/or services sold to offset the income. For example, if you sold a personal item at a gain (sales price is greater than your cost basis), the gain will be taxable and reported on your tax return. If you sold a personal item at a loss (sales price is less than your cost basis), the loss will not be deductible for your tax return. Please consult your tax advisor on how to properly report these items for tax return purposes.
* This article is not a complete listing of all the details related to this business / accounting topic and you should contact your CPA for a more detailed discussion regarding these items and how they may apply to your specific situation.
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