Substantially lower filing threshold for Form 1099-K

Form 1099-K, Payment Card and Third-Party Network Transactions, is an information return used to report certain payment transactions. The American Rescue Plan Act of 2021 substantially lowered the filing threshold for the form to $600 from $20,000. In addition, payment transactions settled after Dec. 31, 2021, no longer have a minimum transaction threshold under which reporting is not required. Certain large third-party payers, such as Amazon or PayPal, may still be exempt from filing a Form 1099-K if total payments to a taxpayer are less than $20,000 or they have fewer than 200 transactions within the calendar year.

Background

In general, banks and other payment settlement entities (those settling payment card transactions) are required to disclose on Form 1099-K the gross amount of transactions exceeding $600 to businesses or individuals accepting credit and debit cards for payment in exchange for goods and services. Taxpayers using a third-party payment network, such as online payment platforms, marketplaces or internet payment service providers, will receive a Form 1099-K from each payment settlement entity used. Each form reports annual and monthly goods and service transaction amounts, the number of transactions and any federal or state withholding. Personal gifts, charitable contributions and reimbursements do not need to be reported.

Payment card transactions are any transactions where a payment card (credit, debit or stored-value card) is accepted as payment. Reportable gross sales can include sales proceeds, sales tax, tips, shipping charges, gift-wrapping, etc. The reportable amount likely will not be reduced by any credits, discounts, fees or refunded amounts. For example:

Taxpayer uses a national bank credit card to purchase $650 worth of sporting equipment from a retailer. The national bank is contractually obligated to settle with the retailer for the credit card transaction. National bank charges a $13 fee so it pays the retailer $637. However, national bank must provide the retailer with Form 1099-K reporting the full $650.

Payment settlement entities must provide Forms 1099-K to taxpayers by Jan. 31 of the following year. Electronically filed forms are due to the IRS by March 31, while paper forms are due by Feb. 28. Should any of these dates fall on a weekend or holiday, the due date becomes the following business day.

The IRS will use Form 1099-K data to verify and improve tax compliance. Taxpayers receiving Forms 1099-K should reconcile the amounts reported on the form to credit card receipts and merchant statements to verify accuracy and then to gross receipts reported on a tax return. Any form errors should be discussed with the issuing payment settlement entity. Form recipients will then want to make sure that the Form 1099-K information is reported on their income tax returns. Guidance regarding specific reporting situations is expected to come later.

Issues

Most settlement entities will not have insight as to whether or not a transaction is taxable. As a result, under these new rules, Form 1099-K could be issued to nonbusiness taxpayers if they sold goods or services through a payment settlement entity. For example, Forms 1099-K could be issued to a college student selling back their textbooks, an individual occasionally selling household items on eBay or a teenage babysitter accepting Venmo or PayPal.

The IRS is also unlikely to have the resources to accommodate the processing of potentially millions of additional Forms 1099-K or to handle the influx of taxpayer questions that are bound to result from the increased reporting requirements. Even with the budget increase enacted as part of the Infrastructure Reduction Act, the IRS has competing priorities, multiple demands and a preexisting historic backlog.

Finally, there is a bipartisan push to change the reporting threshold back to $20,000 or some lesser amount (such as $5,000) and/or reset to a minimum number of transactions. It is uncertain whether this could become part of a late-fall package to renew tax extenders or be included in a future piece of legislation. Without legislative changes, taxpayers can expect to receive Forms 1099-K for transactions not historically reportable.

For more information on this topic, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.