Businesses: Prepare for the lower 1099-K filing threshold

Payment Apps Have New Tax Reporting Requirements

This year, more workers may fall into the required reporting range of income. Therefore, businesses should be aware that they may be responsible for issuing more information reporting forms for 2022. In addition, the filing threshold for Form 1099-K, “Payment Card and Third-Party Network Transactions,” has been drastically reduced beginning this year. As a result, businesses and employees in specific industries may receive more of these forms, and some individuals may receive them due to personal transactions.

Form 1099-K filing background

Payment settlement enterprises (PSEs) or third-party settlement organizations are banks and online payment networks that must report payments to the IRS and recipients in a trade or business. For that, you would use Form 1099-K. Venmo and CashApp, and gig economy facilitators like Uber and TaskRabbit, are among these companies.

A law passed in 2021 reduced the minimal threshold for PSEs to file Form 1099-K for a taxpayer from $20,000 in reportable payments and 200 transactions to $600 (the same threshold as other Forms 1099) beginning in 2022. Because of the reduced filing level for 1099-K forms, many participants in the gig economy will be receiving them for the first time.

Members of Congress have submitted legislation to restore the $20,000 and 200 transaction thresholds. Still, there is no assurance that they will succeed. Furthermore, whether the IRS is notified or not of income from side jobs, individuals should report it. Freelancers who make money making things for Etsy or driving for Uber, for example, should have paid taxes all along. However, according to Congress and the IRS, this responsibility is frequently disregarded. As a result, taxpayers may be unaware that income from these sources is taxable in some situations.

Some taxpayers may first notice this change in January 2023 when they receive their Forms 1099-K. Businesses should prepare for the tax repercussions of the gross amount of Form 1099-K reportable payments starting in 2022.

What to do now

Taxpayers should scrutinize gig and other reportable acts. Verify that payments are correct on the reports. Payments received in a trade or business should be recorded in their entirety so that employees can adequately withhold and pay taxes.

To avoid fines, you may choose to increase your tax withholding. Otherwise, if necessary, you can make scheduled tax payments or higher payments if you receive income from specific activities.

Separate personal payments and track deductions

Separate taxable gross receipts from a PSE are revenue from personal expenses, such as splitting a restaurant check or providing a gift. Because PSEs may not discern between personal and business costs, taxpayers should have separate accounts for each payment type.

Remember that taxpayers who haven’t reported all of their gig income may not have documented their deductions. Therefore, they should begin to reduce the taxable income recognized as a result of gross receipts reported on Form 1099-K. The IRS should adopt the position that all gross receipts recorded on Form 1099-K constitute income. The IRS will deny the deductions unless the taxpayer can prove otherwise. Deductions will vary depending on the taxpayer’s profession.

If you have any questions about your Form 1099-K duties, please contact our RRBB accountants and advisors.

© 2022


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