You might receive a Form 1099-K for tax year 2023 — and beyond. That’s because the America Rescue Plan of 2021 changed the reporting threshold requirement for third-party settlement organizations (TPSOs), which are companies that process payments between two parties.
What Is Form 1099-K?
Form 1099-K isn’t new, but it has been getting more attention due to a recent IRS rule change. The 1099-K reports payments and transactions from online platforms, payment card processors and apps — and its official name is “Form 1099-K: Payment Card and Third Party Network Transactions.”
Previously, you’d receive a Form 1099-K from a TPSO only if you conducted more than 200 transactions equaling at least $20,000 in gross payments. But starting in tax year 2023, the TPSOs will issue one once you’ve received $600 in annual gross payments for goods or services — regardless of your number of transactions.
So, anyone who sells goods or services and receives $600 or more in funds processed by a third-party processor (e.g., Stripe, PayPal, Venmo) should expect to receive a 1099-K, Andrew Griffith, certified public account, says.
[Beyond Paypal: Find out How Venmo and PayPal Payments Stack Up. ]
Why You Might Receive Form 1099-K for Tax Year 2022
The new threshold for 1099-K forms was originally scheduled to go into effect for the 2022 tax year. On Dec. 23, 2022, however, the IRS postponed the new threshold, and tax year 2022 is now a “transition year,” according to the agency. TPSOs may still issue Form 1099-K with the new $600 threshold even though it’s not yet required.
If you receive a Form 1099-K, check the reported information against your records to ensure it’s accurate. Keep in mind that 1099-Ks should include only payments you’ve received in exchange for goods and services — not money you received for personal reasons.
What to Do if Personal Payments Show Up on Your 1099-K
According to the IRS, the new law is not intended to track personal transactions such as birthday gifts, gas money from a friend or bill payments between family members. But they may be included erroneously on a Form 1099-K.
If you receive a 1099-K and it includes a personal payment, the IRS recommends you contact the issuer and request they correct it. The issuer’s name and phone number are located in the upper left corner of the form.
If the issuer doesn’t fix it in time, the IRS says to include the following on your tax return:
— Part I, Line 8z, Other Income, Form 1099-K Received in Error.
— Part II, Line 24z, Other Adjustments, Form 1099-K Received in Error.
[READ: How to Use Venmo, PayPal and Other Payment Apps More Wisely.]
What to Do if Personal Sales Appear on Your 1099-K
If you sell your car, couch or another personal item and accept payment via a TPSO, such as PayPal or Venmo, it will be included on a 1099-K form (if you’ve hit the reporting threshold). A sale that results in a profit will be taxed as a capital gain, but you must report losses on on Form 1040, Schedule 1, as follows:
— Part I, Line 8z, Other Income, Form 1099-K Personal Item Sold at a Loss $x.
— Part II, Line 24z, Other Adjustments, Form 1099-K Personal Item Sold at a Loss $x.
Will 1099-K Changes Impact Your Tax Liability?
The new 1099-K reporting threshold aims to increase voluntary tax compliance. “The way these activities are taxed has not changed, but the way the IRS learns you’ve received payments has,” Charles H Thomas, certified financial planner and founder of Intrepid Eagle Finance, says.
The new law shouldn’t affect your tax liability — unless you weren’t planning on reporting all the gross income you receive through TPSOs. So, what happens if you report less income than your Form 1099-K shows?
If a TPSO reports a 1099-K incorrectly, the IRS will most likely send a tax notice with a mismatching error. This will occur because the IRS receives a copy of the 1099-K from Venmo, PayPal or other TPSO that doesn’t match what the taxpayer claimed on their tax return, Matt Civitello, tax associate at accounting firm McCarthy & Company PC, says.
“According to the IRS, this can hold up refunds and create penalties and interest for taxpayers who undercalculate their tax due,” he says.
[Read: When You Should (and Shouldn’t) Worry if Your Tax Refund Is Delayed.]
How to Prepare for Form 1099-K in 2023
If you receive at least $600 in gross payments for goods and services through a TPSO in 2023, your transactions will be reported on a Form 1099-K at the end of the year.
To avoid the inclusion of personal payments, ask your friends and family members to accurately categorize and notate the payments they send you. For example, Venmo requires you to state the purpose of payments before you can send them. If your roommate is sending you money for groceries, ask them to add a note that says, “Groceries.”
Additionally, consider how you manage the payments you receive. For example, if you transfer your earnings from eBay to PayPal, you may receive 1099-Ks from both TPSOs for the same income. Avoid duplicate taxation and IRS underreporting allegations by ensuring each of your payments goes through only one TPSO.
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What Is Tax Form 1099-K? originally appeared on usnews.com
