Beginning in tax year 2022, individuals, partnerships, LLCs, and corporations that earn more than $600 through various online venues will start receiving Form 1099-K, Payment Card and Third-Party Network Transactions, on which that income will be reported to themselves and the IRS. This change will substantially increase the number of Forms 1099-K required to be filed with the IRS and furnished to recipients in early 2023.
Traditionally, merchants have received Form 1099-K reporting their gross proceeds from payment card transactions with no de minimis thresholds. However, for 2021 and prior years, payments made through various marketplaces and payment processors—third-party settlement organizations, or TPSOs—that connect buyers and sellers were only subject to reporting when the amount paid to a single payee during a calendar year exceeded $20,000 and the aggregate number of transactions with that payee during the calendar year exceeded 200.
Now, as the result of a provision in the American Rescue Plan Act of 2021, if a TPSO—or its electronic payment facilitator, or EPF—makes payments totaling more than $600 in a calendar year to a payee, it will be required to report those payments on a Form 1099-K. Importantly, many Web 2.0 e-commerce websites and gig-economy services are TPSOs for Form 1099-K reporting purposes.
Who Is Required to Report?
A TPSO must report payments made through a third-party network. A third-party payment network is any agreement or arrangement that:
- Involves the establishment of accounts with a central organization by a substantial number of providers of goods or services—generally considered to be more than 50—that are unrelated to the central organization and have agreed to settle transactions for the provision of goods and services with purchasers according to an agreement or arrangement;
- Provides standards and mechanisms for settlement of such transactions; and
- Guarantees payment to the providers of goods and services in settlement of transactions with the purchasers.
There is an exception to reporting by TPSOs for payments made through an EPF. When a TPSO contracts with an EPF to make payments in settlement of third-party network transactions on behalf of the TPSO, the EPF must file Form 1099-K in lieu of the TPSO if the EPF submits instructions to transfer funds to the account of the participating payee in settlement of reportable transactions.
Who Will Receive Form 1099-K in the Future?
Homeowners who rent out their vacation properties through a marketplace typically do not receive Form 1099-K under the existing rules because they usually do not meet the 200-transactions-per-year threshold; similarly, sellers of collectibles on the internet rarely meet the threshold. Likewise, many individuals who seek to earn extra cash via online websites by making deliveries, cleaning houses, babysitting, or performing other services frequently do not earn more than $20,000 during a calendar year. However, under the new law, these property owners and gig workers will now receive 2022 Forms 1099-K reporting their extra income in January 2023 if that income in 2022 exceeds $600.
These Forms 1099-K will not reflect the various deductible expenses associated with that “extra” income such as utilities and depreciation for homeowners, basis in property sold by sellers or the cost of mileage for delivery drivers, all of which must be factored in before any taxable income is determined. For example, a model train collector may have paid $5,000 for model train pieces over several years that they now sell for $8,000, and the marketplace that introduced the seller to the buyer and through which the sale took place may charge the seller a total fee of $800. It may cost the model train seller $200 in postage to send the pieces to its buyers. The Form 1099-K that the seller will receive from the TPSO will report $8,000 in gross proceeds paid. However, the seller’s taxable gain from that sale would only be $2,000. As a result, collectors and other online sellers will need to keep extensive records of their expenses going forward to avoid over-reporting of income and overpayment of tax.
Also, consider the alternative—a teenager who walks dogs to earn extra money. If their income in 2022 exceeds $600, their expenses may be limited to the fees charged by the website that connects them to pet owners, but they will owe income tax—and possibly self-employment tax—on the income they earn.
It is important to note that transactions for personal gifts, charitable contributions, and reimbursements are specifically excluded from Form 1099-K reporting. Most TPSOs will likely attempt to identify such transactions based on their user agreements, which generally specify whether the user will be using the website for personal or commercial transactions. So, while a pool maintenance company that receives payments for its services through a cash app may receive Forms 1099-K in the future, friends sending money to reimburse one of them for theater tickets purchased for a group should not. This is because the pool company should have a commercial agreement while the friends should use personal agreements when signing up for the app.
A Form 1099-K filer must report the gross amount 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’s taxpayer identification number (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.
At this time, there is no specific method by which a payee’s TIN must be collected. However, there has been at least one proposal that would require Form 1099-K filers to collect payees’ TINs on an IRS Form W-9, “Request for Taxpayer Identification Number and Certification,” under penalties of perjury. To avoid backup withholding, payees should be sure to provide their TINs to TPSOs and EPFs when they register to use a site.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Debbie Pflieger is a Principal in EY’s Financial Services Organization. Debbie is EY Americas’ Tax Information Reporting and Withholding Services leader and consults with clients in the information reporting and withholding arena, assisting them to understand and comply with their many obligations in this area.
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