In March 2021, Congress modified the reporting requirements of Third-Party Settlement Organizations (TPOs; ex: Venmo, PayPal, Cash App, etc). Previously, TPOs were required to report transactions via a 1099-K for a payee if they exceeded $20,000 or 200 total transactions annually. Congress lowed the minimum reporting threshold to any amount over $600. This change had many TPO users nervous: how would this affect them? Would they have to report personal transactions like splitting the cost of dinner with friends? How do you report a 1099-K anyway? The change was set to go into effect for 2022, meaning that reporting would be required on upcoming tax returns. However, on December 23, 2022, the IRS issued Notice 2023-10, delaying the reporting requirement by one year.
What is a 1099-K
This is an information form typically provided to small business owners who receive income from 3rd party payment systems. This is most typically encountered when a small business owner accepts credit card payments through a platform like Stripe or Paypal. The 1099-K is reported to the IRS by the 3rd party processor and a form is sent the recipient. The reported income must be included on the recipient's tax report. Failure to report the income appropriately results in a mismatch with the IRS system (i.e. the taxpayer will receive separate communication from the IRS notifying them of an issue with the tax return).
Why did the IRS delay the change?
It seems the primary reason for the delay is public concern. Many taxpayers were concerned about their ability to comply, sharing personal tax information with TPOs, and even how to properly report the 1099-K on their 2022 return. Additionally, the new reporting requirement would place significant burden on the TPOs. Taxpayers should expect the IRS to use this additional year as a transition period to clarify the form and how to properly report the income.
Things to remember
- The delay in the 1099-K requirement does not change taxability of income. If you utilize a TPO in your business, the income should be reported on your annual tax return even if you do not receive a 1099-K.
- If you utilize a TPO for non-business expenses, such as reimbursing a friend for dinner, make sure to properly mark the transaction. Sites like Venmo and Paypal allow you to designate whether the a payment is to friends/family or if it's a business transaction for goods and services. Personal transactions should not generate a 1099-K at tax time.
- If you resell items like furniture or clothing on a site such as Facebook Marketplace or Craigslist, remember that these transactions are not considered business and should not have any tax implications unless you make a profit. Reselling a pair of jeans for $20 that you paid $50 for is not a taxable transaction. Alternatively, if you purchase a piece of furniture for $100, spend $75 refinishing it, and sell it for $300, you have generated $125 of profit and should report the income and expense on your tax return.
Frequently asked questions about Form 1099-K (updated December 2022)
Understanding Your Form 1099-K
New Releases - IRS announces delay for implementation of $600 reporting threshold