Discover the implications of the reduced threshold reporting requirement on individuals and businesses.
The IRS has revised the reporting prerequisites for Form 1099-K. As a result, many will receive this form for the first time. Feeling overwhelmed by a new tax document? The expert team at Out of the Box has you covered.
Understanding Form 1099-K
Form 1099-K serves to disclose income from sales of goods or services exceeding $600 annually through third-party settlement organizations. It provides insights into earnings from such entities.
Who is Responsible for Issuing Form 1099-K?
Individuals and businesses simply receive Form 1099-K. It’s up to payment settlement entities to issue them. These fall into two classes:
Third-Party Settlement Organizations:
- Act as middlemen between buyers and sellers. This group comprises:
- Payment apps like Venmo, PayPal, Zelle, and Cash App.
- Marketplaces such as eBay and Amazon.
- Platforms in the gig economy like Airbnb, Uber, and VRBO.
Merchant Acquiring Entities
Essentially, banks and credit card companies. However, automated clearinghouses aren’t in this category, so their transactions aren’t part of 1099-K reports.
What Changes Are on the Horizon for Form 1099-K?
The 2021 American Rescue Plan introduced updates. Starting in 2023, those who get $600+ annually via the above entities for goods/services will be issued a 1099-K. This encompasses all types of business exchanges.
Previously, Form 1099-K reporting was required only if one engaged in over 200 transactions totaling more than $20,000 within a year.
How Does the $600 Threshold Function?
You’ll get a Form 1099-K if you earn over $600 annually from the mentioned platforms for business activities. This is monitored on an entity-specific basis. So, if you earn different amounts via eBay, Etsy, and PayPal, only those surpassing the $600 limit will issue a 1099-K. It’s crucial to differentiate between business and personal transactions on these platforms.
This lowered threshold may cause confusion and extra paperwork. Ideally, 1099-Ks should target business users. However, if you get one meant for personal transactions, reach out to the issuing entity. If there’s no rectification, consult a tax expert.
Timeline for the New Requirements:
Based on IRS Notice 2023-10, these adjustments apply from the 2023 tax year onwards. The older rules are valid for 2022 and before.
When to Expect Your Form 1099-K:
Entities should send out 1099-Ks by January 31. Most recipients should have theirs by early February.
What About Reimbursements or Personal Sales?
Reimbursements aren’t considered taxable income. If there’s no profit, no 1099-K is generated. However, always track the nature of each transaction.
For personal sales online, if you earn $600 or more via third-party platforms, you’ll get a 1099-K. When declaring this income, you can also mention the cost of goods sold. Remember to consult with a tax advisor for accurate reporting.
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