The Form 1099 changes 2022, as part of the American Rescue Plan, require that businesses earning more than $600 via online payment platforms will start receiving a Form 1099-K, which will also be sent to the IRS. This change affects businesses filing taxes as proprietorships, partnerships, LLCs, and corporations, and includes income received through third-party processors like Venmo, PayPal, Cash App, Zelle, and vendors such as Amazon, Etsy, eBay. Unlike the previous threshold of $20,000 per year and over 200 transactions, this new rule also means that gig workers and individuals renting out residential or vacation properties will receive the 1099-K document and may have to deal with a taxable event. To avoid confusion and penalties, businesses are advised to separate their personal and business transactions, keep detailed records including bank statements, receipts, and invoices, and be prepared to provide their Transaction Identification Number (TIN) to their transaction vendor.
Changes to Form 1099-K Reporting Requirements
From Hampton Roads Small Business Development Center By Mike Austin
If you file taxes as proprietorships, partnerships, LLCs, and corporations, that earn more than $600 via online payment platforms will start receiving a Form-1099-K, “Payment Card and Third-Party Network Transactions” (TPSOs and EPFs), with the information being sent to the client and the IRS. As a result, your clients will in some cases receive a slew of these forms in early 2023.
Implications for Small Business Owners
This means that business-related income received by 3rd party processors such as Venmo, PayPal, Cash App, Zelle, or other vendors, will be providing these forms. Also, if clients sell products via Amazon, Etsy, eBay, or at craft shows or face-to-face, they will receive the 1099-K. This change in legislation was included in the American Rescue Plan, enacted in March 2021.
Record-Keeping and Separation of Business and Personal Transactions
This is a substantial change from prior periods, in which the 1099-K would only be generated when the amount paid to a single payee exceeded $20,000 per year and if there were more than 200 transactions during the same period. This change means that “gig” workers and individuals that rent out residential/vacation properties and collect payments via 3rd party vendors will, for the first time, receive the 1099-K document, and in some cases, will create a taxable event for recipients.
However, transactions for gifts, charitable contributions, and reimbursements are excluded from this requirement. To ensure that clients have historically comingled business and personal cash collections, they should be strongly encouraged to separate these ASAP to prevent confusion in future periods. In addition, in that the 1099-K may include taxable and nontaxable income, good record-keeping is essential. This should include:
- Bank statements
- Receipts
- Invoices
- Other financial documents that reflect taxable income
Reporting Requirements and Compliance
Operationally, a Form 1099-K filer must report the gross amounts of reportable transactions for each month and for the entire year in separate boxes on the Form 1099-K. In addition, a filer must obtain each payee TIN before making a reportable payment or the filer must impose backup withholding at a rate of 24% on the gross amount of the payment. Collecting the data has yet to be finalized, especially regarding the collection of the TINs, but clients need to be aware that they may be required to provide this to their transaction vendor to avoid backup withholding and other penalties. Also, independent contractors that receive more than $600 via a payment service will probably get both a 1099-MISC from the company as well as a 1099-K from the payment service, which will undoubtedly confuse some recipients. Furthermore, starting with tax year 2022, clients will need to be sure to consider the amounts shown on their combined 1099-K forms when calculating gross receipts for their income tax return.
In short, you need to be vigilant in compiling this data or you could end up owing additional taxes and penalties.
Question & Answer
What are the changes to Form 1099 reporting requirements for businesses in 2022?
Businesses earning more than $600 via online payment platforms will start receiving a Form 1099-K, which will also be sent to the IRS.
Which businesses are affected by the new Form 1099 changes?
Businesses filing taxes as proprietorships, partnerships, LLCs, and corporations are affected by the new Form 1099 changes.
What should businesses do to avoid confusion and penalties with the new Form 1099 requirements?
Businesses are advised to separate personal and business transactions, keep detailed records including bank statements, receipts, and invoices, and be prepared to provide their Transaction Identification Number (TIN) to their transaction vendor.
