How Accountants Can Help Clients With the New 1099-K Reporting

While significant changes to Form 1099-K won’t affect the 2022 tax season, it’s important that accountants, businesses, and individuals alike start preparing for them now. Under the new law, the Form 1099-K threshold will be lowered to a mere $600 from $20,000 in payments for goods or services through third-party payment networks. Regardless of when the change is implemented, there will need to be significant change management for those affected. Accountants should plan ahead so they can educate, inform, and advise their clients on how to get compliant.

What You Need to Know About the 1099-K

The Form 1099-K, payment card, and third-party network transactions is an information return used to report certain payment transactions to improve voluntary tax compliance. Businesses and self-employed individuals should receive a 1099-K if they received payments from all payment card transactions, and in settlement of third-party payment network transactions above the minimum reporting threshold of gross payments that exceed $600 and any number of transactions.

Because of the widespread popularity and use of third-party payment platforms, the number of those affected will be significant. And as businesses and individuals begin receiving 1099-K forms, there are a number of challenges that they could encounter, including:

Distinguishing between business and personal transactions: Businesses and individuals use third-party payment platforms for a variety of transactions. A business owner may use PayPal for sales from their store, as well as for transactions from rental properties they own. The same is true for individuals—one could make a profit selling furniture during a clean-out while using the platform to send gifts or reimburse friends for an evening out. It will be difficult to determine what transactions are captured in the 1099-K, and there will need to be a close look to ensure it’s correct.

Receiving audit notices: Because the IRS uses a mapping system to compare the total on your 1099-K with that on your tax return, the chances of getting an audit notice are higher. This is because the 1099-K doesn’t account for sales tax collected, which can lead to higher income numbers than reported on your tax return.

Identifying reporting and form inaccuracies: There’s always a chance that someone will receive the wrong 1099-K form, usually attributed to a wrong name, tax ID, or other information being included. If this occurs, working with the payment platform directly to correct it will be top priority. Additionally, in certain cases, you may receive multiple 1099 forms and will need to ensure that reporting requirements are correct across the forms. For example, a contractor that uses a payment platform to get paid may receive both types of forms. With widespread confusion around 1099-K thresholds and requirements, accountants can serve as a frontline trusted source of information and guidance for millions of Americans.

What Accountants Can Do to Prepare Clients

To start, accountants can do front-end work now to prevent issues when the tax preparation starts. Steps that can be taken now include:

• Determining how clients are using these payment platforms and accounts to understand if there is a mix of business and personal uses.
• Pulling merchant statements for reconciliation with credit card and bank statements so that all business transactions are confirmed.
• Setting up reporting mechanisms to prevent inaccurate payments later in the season.

Firms will also need to look at their own capabilities to ensure that they can assist an influx of client 1099-K requirements. They’ll need to have a mechanism to track, tag, and manage 1099-Ks, and be able to do so in a quick and efficient manner.

As accountants take on 1099-K forms for clients, it will inevitably increase the need for technology to manage client work. In fact, a recent survey shows nearly 80% of small businesses say they would consider switching to a new accountant that uses the latest technology. Accountants will have to focus less on the creation of 1099-Ks and more on how they will store, manage, and categorize them on behalf of their clients—an area where technology will play a key role.

As tax season rolls around, it’s a good reminder for individuals, businesses, and accountants to start taking the necessary steps to be prepared for the changes that will come with the 1099-K form in the future. The first step is to ensure that you or your clients are keeping accurate books. From there, it’s important to pull merchant records and reconcile them against existing records.

Accountants have always been trusted advisers to individuals and businesses alike, but their guidance and expertise will likely become a requirement for many as these new requirements take effect.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Pamela Knudsen is a compliance executive at Avalara, leading multi-tax teams including lodging, beverage alcohol, telecommunications, and sales and use tax. She serves as a leading voice in vacation rental tax compliance and regulation, in addition to bringing in-depth experience across software/SaaS technology as well as ERP systems.

Nicole Davis is the founder and CEO at Butler-Davis Tax & Accounting LLC. She brings almost two decades of experience in accounting, tax, financial management, and advisory services to clients in real estate, construction, retail, financial, and legal services industries.

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