As tax season nears, mailboxes and inboxes across the country are filled with tax forms. This year, confusion is already swirling around changes to Form 1099-K. While those form changes won’t officially kick in until next tax season, here’s what you need to know in 2022.
What is Form 1099-K?
Form 1099-K, Payment Card and Third Party Network Transactions, is used to report certain payment transactions to taxpayers and the IRS.
A reportable payment transaction means a payment card transaction or a third-party network transaction. Payment card transactions include accepting a card, such as a gift card, credit card, or debit card, for goods or services. A third-party network transaction is one that is settled through a third-party payment network such as PayPal or Venmo.
The easy rule: If you are set up to accept payment cards as a form of payment, or use a payment platform, you may receive a Form 1099-K from the company that settles the transaction.
So, for example, if you receive payment through Etsy or Amazon for selling goods, you might receive a Form 1099-K. Or, if you accept payment through PayPal and Venmo for your services, you might receive a Form 1099-K. Some companies, like Uber, also issue Form 1099-K to those non-employees who accept credit cards as payment.
Keep in mind that since the law applies to business transactions, you won’t necessarily receive a form just because you use an app—the law applies to transactions for the provision of goods or services settled through a third-party payment network. Early Warning Services, LLC, the network operator of Zelle, advised that “Payments between friends and family, and eligible small businesses sent through the Zelle Network® are not subject to this law because Zelle® facilitates messaging between financial institutions, but does not hold accounts or handle settlement of funds.” That doesn’t mean that payments received on the platform are necessarily tax-free.
You can find more details in the regulations.
Form 1099-K is relatively new compared to other reporting forms—it’s only been around for about a decade. It was part of the Housing and Economic Recovery Act signed into law in 2008, but the rule didn’t take effect until 2012.
Reporting is required when payments total more than $20,000 and there are more than 200 transactions settled through a third-party network. No threshold applies to payment card transactions.
Before Form 1099-K, taxpayers who provided certain goods or services worth more than $600 were responsible for issuing Form 1099-MISC. With the advent of Form 1099-K, Form 1099-MISC was not to be issued if payments were made with a credit card or payment card and certain other types of payments, including third-party network transactions. The difference created a reporting hole.
The Covid-19 relief bill that was signed into law March 11, 2021, changed the threshold for reporting. As of Jan. 1, 2022, third-party payment networks must report business transactions totaling more than $600 to the IRS on Form 1099-K.
Yep, that’s a big difference.
What to Do
For the 2021 tax year—the tax return that you’ll file in 2022—it should be business as usual. You should receive Form 1099-K by Jan. 31, 2022.
The amount reported on Form 1099-K is a gross amount and does not include any adjustments for credits, cash equivalents, discounts, fees, refunds, or cash back at purchases. This may not represent the actual amount that is taxable to you. Hopefully, you’ve kept great records throughout the year that you can properly report amounts paid to you, annotating or otherwise noting where there may be differences. In most situations, you’ll report Schedule 1099-K income on your Schedule C on your 1040—you’ll also deduct your expenses and account for adjustments on that schedule.
If there is a mistake on the form, you’ll want to take action. If there’s an error, such as a bad taxpayer identification number, or TIN, you should request a corrected Form 1099-K. Be sure to hang on to any correspondence related to the mistake.
If there’s been a change in ownership or form of entity for your business during the year, you should have notified your credit card company or payment platform. If you didn’t, or if the information wasn’t updated, request a corrected Form 1099-K if possible. Otherwise, you’ll need to work with your preparer to properly account for any differences between what’s reported on the form and what’s reported on your credit card.
For the 2022 tax year—the tax return that you’ll file in 2023—third-party payment networks such as PayPal and Venmo will be responsible for reporting under the new threshold. You may need to take steps now to ensure compliance, such as updating your tax information, including a Social Security Number or Tax ID, to continue to accept payments for sales of goods and services during the year.
You also should make sure you keep excellent records. The rollout of the 2012 reporting requirements was not particularly smooth—there was confusion and double-reporting when more than one entity issued a form—and that was with a few years to prepare. With a shorter window and a much (much) lower threshold, there are bound to be problems. With document sales, returns, and adjustments, be prepared to answer questions.
What Not to Do
With remote work and the pandemic, there’s a lot going on. You might be tempted to push off record-keeping with the idea that you will make sense of it later. Don’t. Take steps to keep good records now so you won’t be scrambling to make sense of it all at the end of the year.
It’s not unusual to have more than one business—especially if you’re in the gig economy—and it can be desirable to lump everything together. Don’t do that either. If you have more than one source of income, track and report it separately—even if you receive one Form 1099-K with gross payment receipts for all of your businesses.
You have a responsibility to report income even if you don’t receive the corresponding form. If you don’t receive Form 1099-K, don’t assume you can skip out on reporting. I’ve faced more than one revenue agent on behalf of taxpayers who had not reported income that should have been reported on a Form 1099. In all of those instances, not once has the IRS ever accepted “I didn’t get a form” as a legitimate excuse for not reporting—they have, however, allowed it as an excuse when there were merely discrepancies in the amount.
To avoid over-reporting, some platforms have signaled that they will treat business and personal accounts differently. As a result, users on TikTok and Facebook are lighting up social media advising that you can simply avoid reporting by converting business accounts into personal accounts. There are even step-by-step instructions available. However, if you’re a business, you’re a business. And if something is taxable, it’s taxable. Pretending that business transactions are really personal in nature doesn’t make it so just as my putting on tap shoes doesn’t make me a dancer, no matter how much I want it to be so.
If the plan is to opt out of reporting so that you don’t have to pay tax, that’s not clever—it’s fraud. Even if you plan to report but simply don’t want to deal with the forms, you may be doing your business a disservice—misrepresenting the nature of your transactions can get you kicked off payment platforms.
It’s important to understand this change in the law applies to third-party reporting, not your individual tax obligations. Those haven’t changed. It’s always been the case that you must report your taxable income, whether it is payable to you in cash, on a credit card, through a business checking account, or over a cryptocurrency platform. That said, if you haven’t been reporting correctly, now is your chance to become compliant. It is, after all, a new year.
This is a weekly column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.
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