The American Rescue Plan Act that was passed in 2021 and went into effect on January 1, 2022, changed the requirements for who receive Form 1099-K. This change is intended to improve voluntary tax compliance for Payment Card and Third-Party Network Transactions. Anyone who sells more than $600 in merchandise with any number of transactions, even one transaction, will be receiving the newly revised Form 1099-K. Note: For transactions made after March 11, 2021, the American Rescue Plan Act of 2021 clarifies Form 1099-K reporting by third-party settlement organizations applies only for transactions for the provision of goods or services settled through a third-party payment network.
Prior to TY2022, anyone who received payment through a payment card transaction (e.g., credit cards, debit cards, stored-value cards) or third-party network transactions, like Pay Pal, Venmo, or Cash App, which were greater than $20,000 in gross payments AND more than 200 transactions received the form.
There is a considerable amount of misinformation being spread on social media. Posts stating that taxpayers will be taxed on the amount received on Form 1099-Ks are causing confusion. The new reporting requirement applies to sellers of goods and services only, not personal payments. It is most important for taxpayers who use these third-party settlement organizations to keep accurate records. The IRS is only interested in profits made, not personal payments.
If anyone with a side job, such as hair styling, website development, house sitting or dog walking, receives a Form 1099-K, taxpayers are required to report that as income. However, there are expenses associated with those gigs, such as products used, office space within a home office, advertising, and/or mileage. Taxpayers will want to consult with a tax professional to get advice on record keeping and paying quarterly taxes during the year. Costs associated with keeping a small business up and running can be deducted and help offset tax burdens.
The minimum best practices anyone who uses the above-mentioned methods of receiving payments follow:
Print each transaction and an annual report from each payment platform.
Distinguish transactions as business or personal.
Gather invoices and receipts to back-up deductions such as supplies used and all other receipts as credit card and bank statements do not qualify as receipts.
An Excel spreadsheet is a good method for beginners to track transactions.
Noteworthy personal payment examples:
If anyone using a third-party network sells a piece of furniture that was originally $2000.00, to an online buyer for $1500.00, and has an original receipt showing a higher price will prove that the $1500.00 is not taxable income.
If friends split a dinner bill and funds are sent via a cash transfer app, that transaction is not taxable income.
SPS/GZ is a full-service tax reporting and stock plan administration firm that provides personalized service and exceptional support, utilizing state-of-the-art technology to business clients of all sizes. We create and e-file, various 1099s, including 1099-NEC, Forms 1042-S, 1098-T, Affordable Care Act tax forms, and Forms 3921 and 3922. Our complete and affordable solution allows administrators to simply upload their tax form data file to our secure portal in a few simple steps and we handle everything else to keep your organization compliant. Contact us today at email@example.com or call at (888)375-3049.