One law provision new for tax years beginning in 2022 and after that could catch many individual taxpayers by surprise — particularly those in the "gig economy" — is the much lower threshold at which payment settlement entities must report payments to merchants on Form 1099-K, Payment Card and Third Party Network Transactions. The change was enacted by the American Rescue Plan Act (ARPA), P.L. 117-2.
Previously, a Form 1099-K was not required unless the payee had both an aggregate of $20,000 in gross payments and 200 applicable transactions in a calendar year. ARPA lowered the threshold to $600, with no minimum number of transactions (Sec. 6050W(e), as amended by ARPA §9674(a)).
The Joint Committee on Taxation estimated the provision could potentially increase revenue by $1.08 billion in fiscal 2023 and $8.4 billion through 2031 (Joint Committee on Taxation, Estimated Revenue Effects of H.R. 1319, The "American Rescue Plan Act of 2021" (JCX-14-21), p. 2 (March 9, 2021)).
This means that services such as PayPal, Venmo, eBay, and Airbnb and services by which independent contractors receive third-party payments, such as Uber and Lyft, will track and report to the IRS and to taxpayers transactions generating $600 or more in aggregate gross payments for the year. These forms must be filed with the IRS by Feb. 28 each year, beginning for calendar year 2022 (or March 31 if they are filed electronically) (Regs. Sec. 1.6050W-1(g)). A payee statement with specified information or a copy of the Form 1099-K must be furnished to the payee by Jan. 31 (Regs. Sec. 1.6050W-1(h)).
Exclusion of personal payments clarified
ARPA also clarified (effective on the date of enactment, March 11, 2021) that reportable third-party network transactions are only those involving the provision of goods and services (Sec. 6050W(c)(3), as amended by ARPA §9674(b)). They do not include noncommercial transactions, such as charitable contributions, reimbursements, and personal gifts. Third-party payment services, such as PayPal and Venmo, allow users to tag transactions as personal. So long as a personal transaction is properly categorized, it should not trigger the issuance of a Form 1099-K. This means taxpayers can still use third-party payment services to, for example, split restaurant bills with friends and family; split rent among roommates; and, with siblings, pitch in for gifts for mom and dad.
Fixing incorrect 1099-Ks
Some third-party payment services, like Cash App, will only be sending Forms 1099-K to business customers; they aim to reduce the number of erroneous Forms 1099-K triggered by personal payments. Another provider, Zelle, will not be issuing Forms 1099-K at all. It contends that "the law requiring certain payment networks to provide Forms 1099-K for information reporting on the sale of goods and services does not apply to the Zelle Network" because Zelle merely assists in the messaging between financial institutions; it does not handle the settlement of funds.
In any case, if a taxpayer mistakenly receives an incorrect Form 1099-K, he or she will need to contact the third-party payment processor to request a corrected form. Taxpayers should keep copies of corrected forms as well as any communications with payment settlement entities.
Don't ignore 1099-Ks, and avoid mixing
Taxpayers should be advised to not ignore any Forms 1099-K they receive, even if they believe they are incorrect or relate to a transaction that resulted in a loss and therefore is not taxable. The IRS is likely to pay close attention to these forms as the changed reporting threshold is implemented.
Taxpayers should also avoid mixing personal and business-related transactions in the same third-party payment service account. Doing so will help avoid a commingling of taxable and nontaxable transactions reported on Form 1099-K.
The bottom line
Financial planners and tax practitioners should communicate to their clients the change in Form 1099-K reporting requirements. In addition, they should emphasize that no changes have been made to what is considered taxable income; the only change is the threshold at which Form 1099-K must be issued.
— Tom Adams, CPA, CGMA, Ph.D., and C. Andrew Lafond, CPA, DBA, are both associate professors of accounting at La Salle University in Philadelphia.