If you get paid through apps like Venmo or PayPal or platforms like Etsy or Airbnb, preparing your taxes next year can be a little more confusing than usual.
ONE new the tax reporting rule requires third-party payment platforms to issue you and the IRS a 1[ads1]099-K for business transaction payments if they add up to more than $600 during the year. A taxable business transaction is defined as a payment for a good or service, including tips.
It used to be that these platforms only had to issue you a 1099-K if you participated in more than 200 business transactions for which you received total payments of more than $20,000. But the new lower threshold on $600 opens the door to a virtual paper hunt of tax forms for the 2023 tax filing season.
The increase in 1099-Ks issued early next year will be, in a word, “gigantic,” said Wendy Walker, who chairs the Information Reporting Subgroup of the Internal Revenue Service Advisory Council.
Walker works as a solutions contractor for Sovos, which helps more than 30,000 corporate clients with tax compliance, including issuing all types of 1099s, of which there are at least 16 different varieties.
Some businesses that only had to issue a few thousand 1099-Ks under the previous rules may now be looking at a few hundred thousand, she noted. “Our customers … have reported huge increases in their potential filing obligations as a result of the threshold change,” Walker said.
Those receiving 1099-Ks for the first time must determine what portion of the amount reported on the form is actually taxable versus what portion represents payments that may be deductible business expenses, such as a fee paid to the payment platform or a credit issued to the business, Walker said.
“People are just not going to understand how to take that gross amount and then work out the deductions to get to the taxable amount.”
The new rule does not impose any additional taxes. Nor does it change your obligation as a taxpayer to always report to the tax authorities all your taxable income from your business activities.
But the 1099-K reporting will make it more difficult for someone to evade the taxes they owe by underreporting their business income.
The rule also does not apply to personal transactions you carry out on an electronic payment platform. For example, if a friend sends you money through Venmo to pay for a dinner out, or your mom sends you some spending money.
Finally, the 1099-K reporting rule does not apply to transactions made through Zelle. That’s because Zelle is a payment center that links the payer’s bank account directly to the recipient’s bank account. “Zelle facilitates messaging between financial institutions, but does not hold accounts or handle the settlement of funds,” the company said in a statement earlier this year.
But the IRS can still get reporting on at least some of your business transactions on Zelle, Walker said.
If it is a business-to-business payment over the Zelle network, the business making the payment must provide the receiving business and the IRS with either a 1099-NEC for non-employee compensation or a 1099-MISC for other expenses. explained.
Like the 1099-K, the other forms also provide information to the IRS that will make it more difficult for businesses to understate their income in a tax year.