If you own a business or are an independent contractor, you’re familiar with the form 1099-K. It’s the one you receive every year showing year-end totals for credit card and electronic third-party payments received from third-party applications like PayPal, Zelle, Square, and Venmo, the one you include with all your other 1099s as part of the record of your ordinary income. Even if you aren’t an independent contractor or a small business owner, you know these applications by their ubiquity; almost everyone uses at least one of these four apps in the course of their daily life.
What you might not know is that a provision in the American Rescue Plan Act, which was signed into law back in March of 2021, changed the tax reporting requirements for those who make use of third-party payment applications. The change won’t go into effect until 2022, a fact which we know will be more than enough to convince most of you to close out of this tab. But worthwhile planning for tax season always begins a year in advance, and we promise the information contained here about the new 1099-K reporting requirements will save you time next year.
Before the passage of the American Rescue Plan Act, networks were required to use the 1099-K to report to participating payees year-end total transactions that exceeded $20,000 in amount and 200 or more transactions. Starting in January of 2022, the year-end total amount that is considered reportable drops to $600 per participating payee, regardless of the number of transactions.
What this means for anyone who makes extensive use of money-transferring, regardless of whether that use is personal or professional in nature, is that there is a high chance you will be receiving a 1099-K in your yearly batch of tax documents next year, and going forward. The third-parties will try to determine whether or not the transactions you were conducting were business- or non-business-related, but if they are unsure, they will issue the 1099, both to you and the IRS.
The good news here is that if the transactions that resulted in you receiving the 1099-K are non-taxable—rent-splitting between roomates, for example—then you won’t have to pay any tax on these transactions. The bad news, however, is that you will have to reconcile these transactions on your tax return. The IRS maintains that the burden of proof to prove a transaction is non-taxable rests chiefly on the taxpayer. Starting January 1st, 2022, you should maintain records of any and all payments received through these applications, as well as the purpose of the payment, and whether or not it constitutes a personal or business-related transaction. For reference, here are some examples of untaxable transactions:
- Rent-splitting between roommates
- Splitting dinner bills
- Selling personal items for less than you paid for them
Many of these apps are requesting tax identification information, social security, numbers, and employer identification numbers, and have introduced a feature that will allow you to designate whether your account is personal, or business-related. While we are always quick to remind clients to be wary of providing your social security number to anyone, we would absolutely recommend taking the necessary steps to make sure your third-party payment application account, if you have one, is properly designated. 1099-Ks are supposedly only being issued for business accounts, HOWEVER, that has not been our experience over the last several years; in many instances, 1099-Ks have been issued for personal accounts as well.
This change has the potential to be most frustrating those who are using the apps to conduct business, as there is the real potential for duplication of documents to create reporting headaches. If you are paid by a vendor through these third parties, it’s entirely possible that you may receive a 1099-NEC from the vendor in addition to the 1099-K you receive from the third-party app, which would effectively duplicate the income. In order to avoid over-reporting income and thereby overpaying on your tax, you’ll have to reconcile both the 1099-NEC and the 1099-K on your tax return. In order to avoid filing headaches next year, we recommend all small business owners and independent contractors who use third-party applications track all transactions.
NB: The IRS will send out discrepancy notices (CP2000) if the amounts on the 1099s don’t agree with the amount reflected on your return.
As we said before, worthwhile tax planning always starts a year in advance. Next tax season might not be for another year, but it always feels further away than it truly is. Taking steps now, both to apprise yourself of these new developments regarding 1099-K reporting requirements, and to plan accordingly, whether you are a frequent personal user of third-party money transfer applications, or a business that relies on them to facilitate paperless transactions, will save you time, money, and most importantly, aggravation come next April.