Note: IRS delays the rollout of the $600 threshold for 1099-K reporting.
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The threshold for Form 1099-K remains at $20,000 with a 200 transaction limit for the year 2023. This delay designates 2023 as a transition period, maintaining the existing requirements for reporting.
Check Out These 1099-K 2022 Changes Impacting Businesses Like Yours.
If you’re an online business owner or have worked with the gig economy companies like Uber, DoorDash, Lyft, and others, or find yourself searching terms like ‘Venmo 1099 2022’ or ‘1099-K PayPal’ on Google, then there’s a pretty good chance that you might be familiar with the IRS Form 1099-K.
And if you’re a beginner, Form 1099-K is an IRS return in the 1099 series that primarily focuses on payment cards and third-party network transactions reporting.
In other words, it deals with online payment transactions made with credit cards and online methods, such as Venmo, PayPal, and the lot.
Each time a retailer accepts online or card payments from customers, a third party enables the transaction and reports the payments made to the retailer. This third party could either be a credit card company or a payments network.
The third-party entities must send a copy of Form 1099-K to the retailer (the recipient) reporting the gross amount of the sales transactions occurring in a tax year. The retailer then reviews and confirms the report. After this, the third party must file the finalized copy of Form 1099-K with the IRS by the prescribed due date.
The IRS has introduced new updates to the Form 1099-K reporting regime, starting with the 2022 tax year.
The following will detail the updates, their impact on the 1099-K 2022 reporting regime, and the reasons that accelerated such changes.
So, let’s get started.
What Has Changed In Form 1099-K Reporting In 2022?
Let’s discuss the changes in form 1099-k reporting in 2022.
Update 1: The base/minimum reportable amount on Form 1099-K
Previously, the IRS required the third-party networks and payment card companies to report only if the gross transaction value amounts to $20,000 or more.
The new update scratches this rule and instead requires filers to report all transactions with a minimum gross total amount of $600 or higher.
Update 2: Transaction volume threshold
Previously, the IRS required third-party entities to report the 1099-K payments with a pre-condition of the transaction volume threshold of 200. This means entities had to report only if the total transaction limit hit 200 or higher.
The new update removes this condition altogether and instead requires filers to report all transactions with no cap on the transaction limit.
Update 3: Standardization of all 1099-K reports
Form 1099-K reporting has now been standardized for all entities that report a minimum of $600 gross payments made through third-party networks and payment cards to the participating payees, regardless of the transaction count.
This simplifies the 1099-K reporting process and accelerates 1099-K reporting compliance.
Why Did The IRS Lower The 1099-K Threshold Now?
As you may have observed above, the pre-conditions were self-contradictory and created space for malpractice and misreporting.
Here’s how.
The previous regime required the entities to report only if the gross total equals or exceeds the $20,000 AND if the transaction limit equals or exceeds 200 transactions [1].
This was an issue because some entities were able to reach the $20,000 gross payments threshold but were not able to meet the 200-transaction limit. While others reported more than 200 transactions but the gross total did not equal or exceed the $20,000 threshold.
The contradicting pre-conditions prevented businesses from reporting the total number of transactions and the gross payments made in a tax year, while also creating room for misreporting and malpractice.
This study conducted by the Treasury Inspector General For Tax Administration shows that the US government was creating a tax gap of more than $124 Billion a year due to the inconsistencies within the 1099-K reporting regime. A large number of retailers were not receiving their 1099-K form copies from payers, and as a result, their personal income tax forms also reported incorrect income information [1].
The new updates seek to streamline the 1099-K reporting regime with a few exceptions. This will be detailed as follows.
Understanding The Reality Of 1099-K Reporting In 2022
1099-K payment reports prior to the 2022 tax year are exempted from the new updates to reduce the confusion among taxpayers.
The IRS now officially instructs taxpayers that 1099-K payment reports prior to 2022 with $20,000 in gross total AND with 200 transactions or more, must be submitted per the previous regulations.
1099-K payment reports from the 2022 tax year, i.e. starting January 1, 2022, must be prepared following the new updates, enabling taxpayers to separate their old records from the new ones and comply conveniently.
So, What Now? What Do These 1099-K Changes Mean For Your Business?
If You’re A Payer:
The minimum reportable amount of $600 is standardised for other 1099 forms as well (Example: Form 1099-NEC), simplifying 1099-K reporting. Leverage this and streamline all your 1099-K reports to accelerate reporting accuracy. When your reports are intact, you avoid paying too much or too little tax – saving you from under reported income.
- Form 1099-K Threshold: There are no pre-conditions to 1099-K reporting other than the minimum reportable amount of $600 total gross payments. This enables you to validate the transaction data and report the 1099-K payments made easily. What’s more? This update checks out the compliance narrative, helping you validate your participating payees prior to on-boarding.
- Submit 1099-K Forms: Submit your 1099-K forms per the prescribed due dates to prevent late filing penalties, and IRS audits.
- Validate Your 1099-K Payments: Most importantly, validate your 1099-K payment reports for all previous tax years and allow your payees to weigh in their inputs to ensure that your previous reports are as accurate as your fresh reports.
Prepare your teams for the upcoming tax season in 2023 for the 2022-2023 tax year. Keep a track of all your 1099-K payment transactions and verify the TIN+ legal name information of your payees with the real-time TIN Matching program from Tax1099 to avoid TIN discrepancies from the IRS.
If You’re A Payee:
- Review Your 1099-K Reports
Review your transaction data and validate the reports to ensure that the previous filings report accurate payment information.
- Ask For 1099-K Form Copies From Payers
If you previously did not receive a Form 1099-K from the credit card company or a third-party network entity, then reach out to their accounting teams and ask for a copy of the 1099-K forms.
- Adapt To The New Updates & Comply
The new updates are here to make things easier for payees as well.
While the participating payees don’t have to prepare these forms, payees are still required to report the 1099-K payments received in a tax year on the personal income tax forms.
Validating the receipts of such payments and documenting the transactions of a tax year becomes easy.
There is no limit on the number of transactions occurring in a year. So, payees can ask for a copy of the 1099-K form from the payers without hesitation (and without worrying about reaching a certain transaction threshold) and save the form for documentation and compliance purposes.
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