A New the tax reporting rule requires third-party payment platforms to issue you and the IRS a 1099-K for business transaction payments if they total more than $600 during the year. A taxable business transaction is defined as a payment for goods or services, including tips.
Previously, these platforms only had to issue you a 1099-K if you made more than 200 business transactions for which you received total payments of more than $20,000. But the new lower threshold of $600 opens the door to a virtual paper hunt for tax forms for the 2023 tax filing season.
The increase in 1099-K issued the start of next year will be, in a word, “ginormous,” said Wendy Walker, who chairs the Internal Revenue Service Advisory Board’s reporting subgroup.
Walker works as a solution manager for Sovos, which helps more than 30,000 corporate clients comply with tax obligations, including issuing all types of 1099s, of which there are at least 16 different varieties.
Some companies that only had to issue a few thousand 1099-Ks under the previous rules can now consider a few hundred thousand, she noted. “Our clients…have reported huge increases in their potential deposit obligations as a result of the threshold change,” says Walker.
Those receiving 1099-Ks for the first time will need to determine what portion of the amount reported on the form is actually taxable versus what portion represents payments that may be deductible business expenses, such as fees paid to the trading platform. payment or credit issued to the company, Walker said.
“People just won’t understand how to take that gross amount and then eliminate the deductions to get to their taxable amount.”
The new rule imposes no additional tax on anyone. Nor does it change your obligation as a taxpayer to always report all of your taxable income from your business activities to the IRS.
But the 1099-K filing will make it harder for someone to evade the taxes they owe by underreporting their business income.
The rule also does not apply to personal transactions you make on an electronic payment platform. For example, if a friend sends you money through Venmo to help pay for dinner, or if your mom sends you spending money.
Finally, the 1099-K reporting rule does not apply to transactions made through Zelle. In effect, Zelle is a payment clearinghouse that directly links the payer’s bank account to the recipient’s bank account. “Zelle facilitates messaging between financial institutions, but does not hold accounts or handle the settlement of funds,” the company said in a statement earlier this year.
But the IRS can still get reports on at least some of your Zelle business transactions, Walker said.
If there is a business-to-business payment on the Zelle network, the business making the payment must provide the receiving business and the IRS with either a 1099-NEC for Non-Employee Compensation or a 1099-MISC for other expenses, she explained.
Like the 1099-K, these other forms also provide information to the IRS that will make it harder for businesses to understate their income in a tax year.