The IRS delayed a new rule that would have required an estimated 44 million taxpayers to receive tax forms from payment applications and online marketplaces like Venmo and eBay for the second year. Such taxpayers should be aware of the delay. Still, it does not affect their tax payment or income reporting obligations. Furthermore, the IRS plans to gradually implement the reporting regulations for online payment processors in 2024.

Initially issued in 2012, the information return is IRS Form 1099-K, Payment Card and Third Party Network Transactions. The form aims to report payments from the following:

• Payment applications or online marketplaces (sometimes called third-party settlement organizations)
• Credit cards
• Debit cards
• Stored-value cards, including gift cards

Your payment processors or the payment settlement business should provide the form if you receive payments directly by credit, debit, or gift card. However, over the past few years, online marketplaces and payment apps must send a Form 1099-K only if the total amount of payments you get for goods and services exceeds $20,000 from more than 200 transactions. Of course, they can also send you the form for less money.

The form provides the gross amount of each reportable transaction, broken down by month and for the entire year. The IRS also receives a copy.

The new reporting rule for online payment processors

In March 2021, the American Rescue Plan Act (ARPA) was passed, greatly extending the use of Form 1099-K. The purpose of the modifications was to enhance voluntary tax compliance for these kinds of payments. The IRS claims that when amounts are subject to information reporting, there is a higher tax compliance rate.

ARPA requires online marketplaces and payment applications to disclose payments of more than $600 for selling goods and services. The number of transactions is not significant. Consequently, many taxpayers who take payments through online marketplaces or payment applications would receive the form. The proposed regulatory change may affect “casual sellers” of used furniture, clothing, and other home items. It may also affect small companies and those with side projects.

Initially, the forms were supposed to be sent out in January 2023. Then, the modification was supposed to go into effect for the 2022 tax year. Nevertheless, the IRS issued guidelines in December 2022 indicating that 2022 would be a transitional year for the shift and announced its first implementation delay.

According to the agency, the change must be handled cautiously to guarantee that the forms are only sent to the correct taxpayers and that the taxpayers are aware of their obligations due to this reporting.

The most recent implementation strategy

The IRS anticipates receiving over 44 million Form 1099-Ks in 2024, an increase of roughly 30 million, according to a report released by the U.S. Government Accountability Office (GAO) in November 2023. However, the GAO discovered that “there is no plan in place at the IRS to analyze these data to inform enforcement and outreach priorities.”

The IRS revealed a second postponement of the rule change less than a week later, stating that the prior criteria ($20,000 or more than 200 transactions) will still apply in 2023. The agency mentioned the potential for taxpayer confusion and comments from tax experts, payment processors, and taxpayers.

When the forms began arriving in mailboxes in January 2024, confusion would result. For instance, it needs to be clarified how taxpayers should transfer the stated amounts to their individual tax returns when online marketplaces or payment apps send forms. Appropriate reporting of the income on the form must be on the beneficiary’s:

• Schedule C, Profit or Loss from Business (Sole Proprietorship)
• Schedule E, Supplemental Income and Loss (From rental real estate, royalties, partnerships, S corporations, estates, trusts, REMICs, etc.)
• Appropriate return for a partnership or corporation

Furthermore, the total amount reported may not be taxable since the gross amount of a reported payment excludes any adjustments for any of the following:

• Credits
• Cash equivalents
• Discounts
• Fees
• Refunds
• Other sums

Not every transaction that needs to be reported is taxed, either. For example, you are exempt from paying sales tax when you sell a personal item on eBay at a loss. But if the sale totaled more than $600, it would appear on your Form 1099-K.

Advice for recipients of Form 1099-K

Note that the IRS is not doing away with the lower level. In its most recent release, the agency stated that a $5,000 transitional barrier will be in place for the tax year 2024. The IRS claims that this gradual approach will enable it to examine its operating procedures to address the concerns of stakeholders and taxpayers more effectively.

The IRS recommends carefully studying Form 1099-K to ensure the amounts are correct if you receive one below the current thresholds. It is advisable to ascertain any associated deductible costs that you could be qualified to deduct from your taxes.

The IRS advises you to “zero out” the amount on your return by reporting both the payment and an offsetting adjustment on Form 1040, Schedule 1 if the form contains personal items you sold at a loss. You must report any gain on selling such items as taxable income.

There is no change in the tax rate.

It is important to emphasize that taxpayers’ obligations to declare income on their tax returns remain unaffected by the delay in implementing the new Form 1099-K threshold. Unless specifically exempt by law, all income is taxed, regardless of whether a taxpayer receives a Form 1099-K. Please contact our RRBB advisors if you have any questions regarding the reporting of online payment processors.

© 2023

The post IRS delays new reporting rule for online payment processors appeared first on RRBB.

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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