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How The New 1099-K Filing Rule Is Adversely Impacting Small Business Owners

Note: IRS delays the rollout of the $600 threshold for 1099-K reporting.
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.

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Small business owners raise concerns over the new 1099-K rule implemented through ARPA of 2021.

Did you know that the gig economy contributes to nearly 6% of the total U.S. GDP?

It’s true.

The gig economy is growing at 3X faster than the total U.S. workforce, making it home to 36% of the total U.S. workforce.

While the gig economy proves itself to be a reliable means to earn a few extra dollars outside the traditional work arrangements, it’s important to understand that many irregularities are slowing down its growth.

With a view to improving the regulatory compliance experiences within the gig economy, the Biden administration, through the enactment of the American Rescue Plan Act (ARPA) of 2021, is changing the 1099-K reporting requirements.

What’s The New 1099-K Rule?

Previously, the IRS required the payment settlement entities (PSEs) to prepare and file Form 1099-K if the gross total of reportable payments exceeds $20,000 and if the total number of transactions was beyond 200.

With the new rule, PSEs would need to file a 1099-K for each payee to whom they’ve paid $600 or more, regardless of the number of transactions.

Essentially, the rule has reduced the minimum reportable threshold for 1099-K payments. The move plans to streamline reporting irregularities in the gig economy and other emerging markets like crypto.

Critics claim that the new 1099-K reporting rules are a “burden” to small business owners who sell used goods and other miscellaneous products online for a few extra dollars.  

Why Small Business Owners Are Concerned

While most small business owners are okay with the new tax compliance rules, some small business owners, self-employed professionals, and others do not agree with the new rules because of the underlying impacts on income tax.

To reiterate, the PSEs must report payments made beyond $600 to merchant businesses and small business owners via payment apps like Venmo, PayPal, Cash App, and others.

The “payments” that the merchant payees receive are technically income, and the IRS will tax them for the same.

So, a small business that was previously receiving a gross total of $16,000 through payment apps like Venmo for selling merchandise online with 150 transactions in total was not taxable in 2020.

This is because the 1099-K reporting requirements stress the qualification of third-party payment settlement transactions, which are:

·         The gross total of reportable payments must be over $20,000 AND

·         The total number of transactions must be 200 or more.

These rules only apply to returns filed for calendar years before 2021.

The situation is not the same in 2022.

If you’re receiving more than $600 (gross total) through payment apps like PayPal from your customers/clients, then such income is taxable, according to the new 1099-K 2022 reporting requirements of the IRS.

Adverse Effects Of New ARPA-Backed 1099-K Rule

According to critics, the following are some of the adverse effects of the new 1099-K rule.

  • Miscellaneous online sellers are taxed

Small businesses that do not sell products full-time and do not provide services full-time will also be taxed per the new rules if they receive payments over $600 in gross total.

  • All goods and service transactions are considered with a few exceptions

Form 1099-K new rules apply to transactions that exclusively deal with goods and services. However, there are some exceptions.

Sales made at a loss, and the sale of personal items and gifts at a loss, will not be taxable.

Refunds, returns, and other contingent transactions will be exempted from the new 1099-K 2022 rule.

  • One-time sale transactions are also taxed

If you sell a product, or provide a service just once, but receive more than $600 from your customer via payment apps, it will be treated as income. And you will need to pay a tax on such an income. The PSE will issue a Form 1099-K for the same.

Regardless of you receiving a 1099-K from the payer, you must consider it as income and keep your tax reports transparent to avoid notices from the IRS.

  • Micro businesses & self-employed individuals can’t hide their side income

The biggest concern for the gig economy is that many working individuals prefer the gig economy for its flexibility. This includes earning a few extra bucks on the side without having to pay tax on the said income.

However, with the new regulatory changes, this may not be possible. All the extra or side income in excess of $600 will be taxed.

  • Rise in expenditure

Small business owners will need to invest in tax advisory services to gain clarity on the 1099-K reporting rules and incorporate sophisticated accounting tools to keep a track of their income receipts.

This is an additional expense for small business owners who are already navigating through inflation in 2022 and just operating their small businesses to earn enough to make ends meet.

The good news is that the payment settlement entities are already updating their online resource pages to help their users understand the new rules.

Some apps are even coming up with new in-app features, which will help differentiate personal transactions from commercial ones. This will make payment tracking easy for the PSEs and the payees.  

However, it’s also recommended to maintain a comprehensive record of payments you receive month-on-month through each PSE to ensure accuracy of income received and tax owed.

There is some level of responsibility on the PSEs too. This is because the payer is in charge of reporting the 1099-K payments made in a calendar year accurately.

If you own a PSE or work for one, get Tax1099 for your business.


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