This year, there is a new 1099-K filing threshold. Businesses should be aware that they may be responsible for issuing more 2022 information reporting forms because more workers may now fall into the required range of income that has to be reported. In addition, beginning in 2022, the Form 1099-K threshold has dropped significantly for the “Payment Card and Third-Party Network Transactions.” As a result, businesses and workers in specific 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 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 from $20,000 of reportable payments made 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 receive a 1099-K for the first time.
Members of Congress have introduced bills to raise the threshold back to $20,000 and 200 transactions, but there’s no guarantee that they’ll pass. In addition, taxpayers should generally be reporting income from their side employment engagements, whether it’s reported to the IRS or not. For example, freelancers who make money creating products for an Etsy business or driving for Uber should have been paying taxes all along. However, Congress and the IRS have said this responsibility is often ignored. 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 prepare 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. Make sure payments are recorded 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, such as splitting the check at a restaurant or giving a gift. PSEs can’t necessarily distinguish between personal expenses and business payments, so taxpayers should maintain separate accounts for each type of payment.
Keep in mind that taxpayers who haven’t been reporting all income from gig work may not have been documenting all deductions. They should start doing so now to minimize the taxable income recognized due to the gross receipts reported 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 us if you have questions about your Form 1099-K responsibilities.