The American Rescue Plan Act (ARPA) that was enacted in March 2021 brought about substantial changes to Form 1099-K reporting standards. Originally meant to begin for the 2022 tax year, the IRS has extended the new requirement until the 2023 tax year citing confusion and lack of guidance available to the public. However, taxpayers should become aware with these new requirements that are slated to come into effect in the current tax year.
Current Requirements:
As the rule stands now, third party payment networks, such as etc., are required to issue a 1099-K form when a seller hits both $20,000 in gross sales and 200 transactions for the full year. This limit has been beneficial to both small business taxpayers and third party payment networks in reducing the overall administrative burden. Under the current reporting requirement, small business taxpayers even have the ability to file their tax returns more quickly as they can rely solely on their own records to complete their returns, without having to wait for a 1099-K to be issued to them.
New Requirements:
Any seller who receives $600 or more in receipts for their goods or services while using any third party payment networks will be issued a 1099-K. There is no transaction minimum under the updated requirements, meaning a seller who receives one $600 payment in 2023 will be issued a 1099-K. The burden this will place on these platforms will naturally result in filing delays for every seller waiting for the platform to turn around an astounding amount of 1099-Ks.
There is an understandable concern that these payment platforms may erroneously file a 1099-K with the IRS for individuals who received payment in a personal, nonbusiness capacity if a taxpayer doesn’t properly setup their account. This will be a detriment to these taxpayers receiving a 1099-K in error, as the taxpayer will be tasked with asking the payment platform to issue a corrected 1099-K with a $0 balance, or risk paying tax on income they didn’t receive.
An additional consequence to the reporting shift is that some taxpayers may see higher costs associated with their tax compliance process. Those taxpayers who have historically been below the current reporting threshold may seek out help from a tax professional given their lack of understanding on how they will need to incorporate the 1099-K into their tax returns.
Regardless of the new reporting requirements, one thing that won’t change is the amount of tax that a seller will be required to pay on these transactions. While the IRS will enforce this new reporting standard, it’s important to understand that these payments have always been, and continue to be, taxable.
Taxpayers can prepare for the upcoming changes by ensuring their information is accurate with each of the platforms they use. This means verifying their names, SSNs or EINs, and addresses are current in their profiles. They will also want to ensure their recordkeeping is strong in order to confirm that the amounts which will be reported to them align with what their records indicate.
Article by Jarrod Galassi, Senior Tax Manager
