While 1099-K Forms are not new, it is in the spotlight after getting a specific rule change. With the new reporting threshold rule change, the goal of the IRS is to make 1099-K forms more accessible to taxpayers in 2023. Currently, new updates from the IRS on 1099-K forms continue to be one of the top stories in the finance landscape.
But in turn of new events and after the IRS announcement on December 23, 2022, the new rule change has been delayed. According to the released updated FAQ document by the IRS for tax professionals and taxpayers concerning Form 1099-K, there will be a delay in reporting threshold in Form 1099-K.
Congress had already enacted this 1099-K reporting threshold in the 2021 ARPA or American Rescue Plan. In layman’s terms, reporting threshold in 1099-k is down to $600 from $20,000. Naturally, it has become a cause of celebration for eCommerce merchants, tax professionals, small businesses, and individuals.
However, this new rule change is bad news for TPSO, or third-party settlement organizations that use platforms like eBay, CashApp, Venmo, Etsy, and PayPal to process payments for a wide range of products or services may see adverse effects. Overall, the IRS states that a delay in implementing the rule change won’t affect many people and businesses.
Enacted New Rule Change and Role of ARPA
Remember that this change had been enacted as part of the Democrats’ ARPA, and now it may affect millions of citizens that regularly utilize third-party apps and subsidiaries to receive and send money. On the bright side, this change won’t come into effect until the upcoming tax season.
In a broad sense, the new rule change took effect back in late 2022 and is bound to benefit platforms, individuals, and businesses in the 2023 tax season. Usually, tax season comes with many obstacles and challenges. So, this new rule change came across as a present from the IRS for businesses and individuals. However, the delay in the new rule change has raised some concerns.
Let’s look at what rule change delay means for taxpayers and what it means for their 2023 tax filing:
Impact of New Changes
The updated document highlights that the IRS intends to make a successful transition of a new rule that decreases the reporting threshold to just $600. In 2023, some taxpayers might get the 1099-K form in error with decreased threshold despite the delay in the new rule change.
In short, taxpayers should consider the implementation delay in line with the IRS announcement about reporting threshold rule change. Technically, payment companies and platforms won’t have to report their tax-based transactions in Form 1099-K with the same reporting threshold.
Talking about the IRS new 1099-K updates, Doug O’Donnell, the IRS Commissioner, states that this rule change implementation will provide more guidance and clarity for taxpayers and tax professionals. So, how will the delay in implementing new Form 1099-K changes impact businesses and platforms?
With new updates on 1099-K forms, the delay would allow the IRS to address the confusion about the 2023 tax season and ensure seamless tax filing. Besides, it is in the best interests of the taxpayers to get a basic understanding of new reporting threshold requirements to ensure errorless tax filing season.
What is the Use Case of Form 1099-K?
Oftentimes, taxpayers overlook the fundamental purpose of using Form 1099-K. At its core, the state and federal Form 1099-K is passed on to the IRS to report specific payments from third-party settlement entities.
Primarily, Form 1099-K is used for various tax records so taxpayers can report and find out if one or more of their payment is eligible for taxable income. Historically, the main use case of the 2008 Housing Tax Assistance Act was to support housing reform.
But like most laws, more requirements came into effect. In fact, they became part of the finalized bill, including requiring TPSO or third-party settlement organizations to report specific payments to the IRS. But the 2021 American Rescue Plan brought significant changes to the existing reporting threshold and reduced to $600 from $20,000.
First, you have to assume there’s no more delay and the new change rule finally comes into effect at the start of the 2023 tax season. If so, individuals and organizations that send or receive payments for products or services amounting to $600 will be subject to the new rule.
Specifically, the payment network of a third-party organization will have to report that individual or company’s income in Form 1099-K. Also, understand that the new reporting threshold of $600 is a collective amount and doesn’t depend on total received or sent payments.
Updated Reporting Requirement: Implementation Delay and Transition
As per the IRS 2023-10 notice, there will be delays in implementing new reporting updates and requirements. The delay applies to transactional reporting over $600 or occurring after the 2022 calendar. It is also vital to understand that the IRS looks at the delay as a transition time for TPSO or third-party settlement organizations.
In any case, the new reporting threshold comes into effect if the third-party network, third-party payee, or person receives payment from a TPSO. But the nature of this transaction has to be business. There’s improved tax compliance, and part of it has to do with swift 2021-22 congressional action.
The IRS acknowledges that tax compliances become more complicated and higher if the amount requires information reported in Form 1099-K. The tax agency also notes that taxpayers should be aware of the cause-and-effect of reporting. Similarly, software providers should have the reporting information in place to help out taxpayers.
Who Should File Form 1099-K?
1099-K forms use transactional information in a dedicated network higher than state or federal reporting thresholds. Previously, the federal reporting threshold was $20,000 for payments up to 200 transactions. But the reporting threshold is reduced to $600 for transactions.
It means there will be more number of 1099-K forms used by taxpayers throughout the tax season in 2023. For example, if you get a 1099-K form – assume it is based on your current payment activity to process current transactional payments. If you’re wondering who will need to file the Form 1099-K, it comes down to parties sending and receiving payments.
Assume an ABC Company sells apps and collects payments through a payment platform. That year, the organization earned hundreds and thousands of dollars and fulfilled over thousand transactions. In this case, ABC Company will need to get Form 1099-K from the payment platform. But consumers that bought the apps won’t have to deal with the Form 1099-K to process, review, or report payments.
Businesses Processing Payments between Multiple Users
Assume a property management company helps process rental payments and agreements between tenants and landlords. And the landlord has 20 real estate properties, each renting for $1,000 a month. The property management company charges and processes the same amount throughout the tax calendar.
By the end of the year, the land will get the Form 1099-K to process all gross payments on 20 properties. In this case, twenty properties multiply by 12 months’ rent equals $240,000 of gross payments. However, tenants won’t receive the 1099-K form.
Receiving Form 1099-K: What Should be Your Response?
State and federal 1099-K forms highlight tax return information and gross reported payments and don’t necessarily showcase reported income. It means taxpayers should use Form 1099-K in relation to their tax information. Taxpayers can use the tax information from invoices and bank statements to figure out actual taxable income.
While some tax platforms offer tax forms like 1099-K and basic guidance, it s better to consult with a professional tax specialist to find out whether or not you have to comply with any tax reporting based on specific payments and transactions.
What Lies Ahead?
According to the IRS, taxpayers should be on the lookout for new implementation details to understand the full extent of the impact on third-party payment processing and settlement firms. From the taxpayers’ perspective, they’ve already got their Form 1099-K as part of the statutory changes.
The IRS is actively working to offer clear guidelines for taxpayers to better understand the new change rule of reporting threshold and delay impact for the 2023 tax season. The IRS, however, notes that the current Form 1099-K with the previous $20,000 payment reporting threshold for more than 200 transactions will be intact.
In the digital age, there is a transformative change in how the IRS communicates information to taxpayers and sets new changes in effect. In fact, there’s a heightened communication across businesses, individuals, and independent contractors.
More advanced technology often propels the IRS to reevaluate existing legislatures and make new changes. For instance, reporting requirements for payment and credit card companies involve collecting data and influencing voluntary and prompt tax compliance.
For businesses and individuals, the wise course of action is to reach out to a tax expert and see whether or not this new IRS change would impact their 2023 tax season.