As tax season approaches, mailboxes and inboxes across the country are filled with tax forms. This year, there is already confusion around the changes to Form 1099-K. While these shaping changes won’t officially take effect until the next tax season, here’s what you need to know in 2022.
What is Form 1099-K?
Form 1099-K, Payment Card and Third Party Network Transactions, is used to report certain payment transactions to taxpayers and to the IRS.
A reportable payment transaction means a payment card transaction or a third-party network transaction. Payment card transactions include accepting a card, such as a gift card, credit card, or debit card, for goods or services. A third-party network transaction is a transaction that is settled through a third-party payment network such as PayPal or Venmo.
The simple rule: If you are configured to accept charge cards as a form of payment, or if you use a payment platform, you may receive a Form 1099-K from the company paying the transaction.
So, for example, if you receive a payment via Etsy Where Amazon to sell goods, you may receive a Form 1099-K. Or, if you accept payment through PayPal for your services, you may receive a Form 1099-K. Some companies, like Uber, also issue Form 1099-K to non-employees who accept credit cards as a method of payment.
You can find more details in the regulations.
Form 1099-K is relatively new compared to other reporting forms – it has only been around for about a decade. This was part of the Housing and Economic Recovery Act enacted in 2008, but the rule did not come into effect until 2012.
The report is obligatory when payments total more than $ 20,000 or if there are more than 200 transactions settled through a third party network. No threshold applies to payment card transactions.
Prior to Form 1099-K, taxpayers who provided certain goods or services with a value greater than $ 600 were responsible for issuing Form 1099-MISC. With the advent of Form 1099-K, Form 1099-MISC did not have to be issued if payments were made with a credit card or charge card and certain other types of payments, including third-party network transactions. The difference created a reporting hole.
The Covid-19 relief bill, which was enacted on March 11, 2021, changed the reporting threshold. As of January 1, 2022, third-party payment networks must report business transactions totaling more than $ 600 to the IRS on Form 1099-K.
Yes, that’s a big difference.
What to do
For tax year 2021 – the tax return you will be filing in 2022 – this should go as usual. You should receive Form 1099-K by January 31, 2022.
The amount shown on Form 1099-K is a gross amount and does not include any adjustments for credits, cash equivalents, discounts, fees, refunds, or cash back on purchases. This may not represent the actual amount that is taxable to you. I hope you have kept excellent records throughout the year that allow you to properly report amounts paid to you, noting or otherwise noting possible discrepancies. In most situations, you will report income from Schedule 1099-K on your Schedule C on your 1040 – you will also deduct your expenses and post adjustments on that schedule.
If there is an error on the form, you will want to take action. If there is an error, such as a wrong Taxpayer Identification Number, or TIN, you should request a corrected Form 1099-K. Make sure to hang on to any correspondence related to the error.
If there has been a change in ownership or entity form for your business during the year, you should have notified your credit card company or payment gateway. If you haven’t, or if the information hasn’t been updated, request a corrected Form 1099-K if possible. Otherwise, you will need to work with your preparer to properly account for any difference between what is shown on the form and what is shown on your credit card.
For tax year 2022 – the tax return you will file in 2023 – third-party payment networks such as PayPal and Venmo will be responsible for reporting below the new threshold. You may need to take action now to ensure compliance, such as updating your tax information, including a social security number or tax identification number, to continue accepting payments for sales. of goods and services during the year.
You also need to make sure you keep excellent records. The rollout of the 2012 reporting requirements was not particularly smooth – there was confusion and double reporting when more than one entity published a form – and it took a few years to prepare. With a shorter window and a much (much) lower threshold, there are bound to be problems. With document sales, returns, and adjustments, be prepared to answer questions.
What you should not do
With remote working and the pandemic, a lot is happening. You might be tempted to push back on record keeping with the idea that you will find meaning in it later. No. Take steps to keep good records now so you don’t have to struggle to figure it out at the end of the year.
It is not uncommon to have more than one business, especially if you are in the odd-job economy, and it may be desirable to consolidate everything. Don’t do that either. If you have multiple sources of income, track and report them separately, even if you receive a Form 1099-K with gross payment receipts for all of your businesses.
You are responsible for declaring your income even if you do not receive the corresponding form. If you don’t receive Form 1099-K, don’t assume that you can ignore the return. I have met more than one revenue officer on behalf of taxpayers who did not report income that should have been reported on a Form 1099. In all of these cases, not once has the IRS accepted ” I did not receive a form “as a lawful excuse not to report – they, however, allowed it as an excuse when there were simply discrepancies in the amount.
To avoid over-reporting, some platforms have reported that they will treat work and personal accounts differently. As a result, TikTok and Facebook users are shining a light on social media telling them that you can just avoid reporting by converting work accounts to personal accounts. There are even step-by-step instructions available. However, if you are a business, you are a business. And if something is taxable, it’s taxable. Pretending that business transactions are really personal in nature doesn’t do so much, just as tap dancing doesn’t make me a dancer no matter how badly I want to.
If the plan is to refuse to report so you don’t have to pay tax, that’s not smart, it’s fraud. Even if you plan to report but just don’t want to process the forms, you may be doing your business a disservice.
It is important to understand that this change in law applies to third party returns, not your individual tax obligations. These have not changed. This has always been the case, you have to report your taxable income whether it is payable to you in cash, on a credit card, through a business checking account or through a cryptocurrency platform. Having said that, if you haven’t flagged correctly, now is your chance to become compliant. It is, after all, a new year.
This is a weekly column by Kelly Phillips Erb, the Taxgirl. Erb provides commentary on the latest tax news, tax law and tax policy. Find Erb’s weekly column in Bloomberg Tax and follow her on Twitter at @taxgirl.