Effective January 1, 2022, businesses or individuals that receive $600 or more in payments for goods and services through a third-party payment network will receive an information return on Form 1099-K, with that information also reported to the IRS.
The new rule is a component of the American Rescue Plan signed into law in March of 2021 and primarily targets payments received through apps such as Zelle, Venmo, PayPal, Cash App, and more.
Scott Clay, a local accountant and director of the tax division at Riney Hancock CPAs, said the new policy is “merely a tax reporting change and not a change in income tax law.”
Third-party payment networks were previously only required to report payments that exceeded $20,000 and more than 200 transactions within a year. The new policy requires those networks to report cumulative revenues of $600 with no minimum number of transactions by issuing 1099-K forms to their users.
“If you keep good records and report your income for business transactions, you have nothing to worry about,” Clay said. “Form 1099-K has been around for a long time, and even though a person might receive one, the amounts reported are not necessarily taxable. When required, the forms are issued for all payments of goods and services, whether they are taxable or not.”
The reporting change simply increases the chances that someone who isn’t reporting income from third-party transactions has a greater chance of being detected. Clay said this likely wouldn’t affect larger businesses, but rather smaller businesses that fail to maintain proper records.
“If you do things the right way, you have nothing to worry about,” he said.
Here’s what you need to know:
If you use third-party payment networks, they will send you a Form 1099-K to document income received through electronic payments for goods and services. As a result of the expanded reporting requirement, users should expect to receive requests from the networks for social security numbers or business tax identification numbers.
Remember, as Clay said, this is not an additional tax, but a reporting change to the existing law. The form will report combined taxable and nontaxable income sources on one line; it’s imperative to understand the difference.
Common examples of taxable income include tips, salaries, wages, and rents from personal property.
With the IRS paying closer attention to these transactions, barbers, hairstylists, lawn specialists, landscapers, private sitters, and more will need to focus more attention on their record-keeping. The same is true for someone who peddles on Facebook Marketplace, eBay, or the local flea market for a profit.
Common examples of nontaxable income are financial gifts from loved ones and reimbursements from friends for food or rent.
You needn’t worry if you’re selling a personal item – such as a sofa you purchased 10 years ago – for a loss on one of the sites mentioned above, as that is not taxable. However, it would still be beneficial to maintain accurate records.
