April 6, 2022 - Tax Group News: New IRS Form 1099-K Rules May Create Tax Reporting Complications For Online Businesses And Gig Workers
The information reporting form, IRS Form 1099-K (Payment Card and Third-Party Network Transactions), is used to track business payments made through credit or debit card and peer-to-peer services such as Venmo, Cash App and PayPal. The American Rescue Plan of 2021 sharply reduced the reporting threshold at which third party credit card and payment processing networks (“Third Party Settlement Organizations” or “TPSO”) must issue IRS Form 1099-K to payees. As a result, millions of taxpayers who are self-employed, freelancers, online retailers, rent their vacation homes through websites such as VRBO or Airbnb or are otherwise part of the gig economy and who accept payment by credit/debit card or through peer-to-peer networks may have much more complicated tax reporting starting in 2022 than in prior years.
Prior to the year 2022, Third Party Settlement Organizations were generally required to issue Form 1099-K to a payee that reported over $20,000 in sales or services and over 200 individual business transactions through the TPSO. Beginning with the 2022 tax year, the TPSO must send a Form 1099-K to the payee if the payee generates total sales or services in excess of $600 for the calendar year through a TPSO regardless of the number of transactions. Consequently, many small businesses, contract workers and landlords will receive a Form 1099-K for the first time with respect to their 2022 business activities.
As a result of the new reporting rules, it will be extremely important for payees to keep accurate records. This is because the Form 1099-K will report the gross amount of the payments made to the payee without any reductions for discounts, deductible fees, refunds or other expenses. Additionally, amounts reported on Form 1099-K may also be included on another Form 1099. This could happen, for example, if the payee receives a Form 1099-K from their transaction service and another Form 1099 from the customer who paid them. Also, if the payee accepts credit card payments and uses a third party to process the payments, both the credit card company and the third-party processor may issue the payee a duplicative Form 1099-K for the same amounts. In addition, transactions for personal gifts, charitable contributions and reimbursements are excluded from Form 1099-K reporting but they nevertheless may be included on the Form 1099-K unless the TPSO is able to identify them as such.
Sole proprietors report the Form 1099-K information on Schedule C, and partnerships and corporations report the Form 1099-K information on their appropriate income tax return. Amounts related to rental real estate will be reported on Schedule E.