Businesses: Prepare for the Lower 1099-K Filing Threshold

Businesses: Prepare for the Lower 1099-K Filing ThresholdBusinesses should be aware that they may be responsible for issuing more information reporting forms for 2022 because more workers may fall into the required range of income to be reported. Beginning this year, the threshold has dropped significantly for the filing of Form 1099-K, “Payment Card and Third-Party Network Transactions.” Businesses and workers in certain industries may receive more of these forms and some people may even get them based on personal transactions.

Background Of The Change

Banks and online payment networks — payment settlement entities (PSEs) or third-party settlement organizations (TPSOs) — must report payments in a trade or business to the IRS and recipients. This is via on Form 1099-K. These entities include Venmo and CashApp, as well as gig economy facilitators such as Uber and TaskRabbit.

A 2021 law dropped the minimum threshold for PSEs to file Form 1099-K for a taxpayer. This updates is from $20,000 of reportable payments to the taxpayer and 200 transactions to $600 (the same threshold applicable to other Forms 1099) starting in 2022. The lower threshold for filing 1099-K forms means many participants in the gig economy will be getting the forms for the first time.

Members of Congress have introduced bills to raise the threshold back to $20,000 and 200 transactions. However, there’s no guarantee that they’ll pass. Additionally, taxpayers should generally be reporting income from their side employment engagements, whether they are reporting it to the IRS or not. Examples where taxpayers should have been paying taxes all along include:

  • Freelancers who make money creating products for an Etsy business.
  • Driving for Uber.

However, Congress and the IRS have said that taxpayers often ignore responsibility. In some cases, taxpayers may not even be aware that income from these sources is taxable.

Some taxpayers may first notice this change when they receive their Forms 1099-K in January 2023. However, businesses should be preparing during 2022 to minimize the tax consequences of the gross amount of Form 1099-K reportable payments.

What To Do Now

Taxpayers should be reviewing gig and other reportable activities, along with making sure of recording payments accurately. Payments received in a trade or business should be reported in full so that workers can withhold and pay taxes accordingly.

If you receive income from certain activities, you may want to increase your tax withholding. Or, if necessary, make estimated tax payments or larger payments to avoid penalties.

Separate personal payments and track deductions

Taxpayers should separate taxable gross receipts received through a PSE that are income from personal expenses. Examples include splitting the check at a restaurant or giving a gift. PSEs can’t necessarily distinguish between personal expenses and business payments. As such, taxpayers should maintain separate accounts for each type of payment.

Keep in mind that some taxpayers aren’t reporting all income from gig work. As such, they may not have been documenting all deductions. To minimize the taxable income, they should start doing so now. This income is seen due to the reporting of gross receipts on Form 1099-K. The IRS is likely to take the position that all of a taxpayer’s gross receipts reported on Form 1099-K are income and won’t allow deductions unless the taxpayer substantiates them. Deductions will vary based on the nature of the taxpayer’s work.

Contact our accounting firm if you have questions about your Form 1099-K responsibilities.