Here’s what changes for your business with the new updates introduced by the American Rescue Plan Act in 2022.
The American Rescue Plan (ARPA) 2021 was signed into law by president Joe Biden in early 2021. While the plan offers a variety of benefits to Americans, it also focuses on correcting certain regulatory inconsistencies in the 1099 reporting context, prevailing in industries, such as healthcare, gig economy, and financial services to name a few.
Previously, the third-party payment networks and payment card entities were required to report with Form 1099-K only IF they have paid to the participating payees a gross total of $20,000 in a calendar year AND if the goods and services transaction volume exceeds the threshold of 200.
However, the new changes mandate the reporting of ALL transactions pertaining to the sale of goods and services, with no limit on the transactions. The changes introduced also ask the payment settlement entities to report gross total payments exceeding $600 on Form 1099-K.
What this essentially means is that the third-party payment settlement organizations are required to be more transparent in their approach to reporting online sale transactions they process.
Let’s take a look at the recent developments of Form 1099-K reporting instructions in detail and how these changes impact your business in 2022.
What was wrong with the older 1099-K reporting requirements?
The previous reporting requirements for Form 1099-K instructed the payment settlement entities (third-party payment networks and payment card entities) to only report IF the gross total payments exceeded the $20,000 threshold AND only if the transaction volume equals or exceeds 200.
Only, there was a slight problem. The preconditions seem to overlap one another.
Here’s what the previous Form 1099-K reporting instructions failed to clarify:
Should payment settlement entities file a Form 1099-K if the transaction count exceeds 200 but the total gross amount does not reach the $20,000 threshold?
And should entities file a Form 1099-K if the gross payments exceed the $20,000 limit but the transaction limit doesn’t meet the threshold of 200?
Wouldn’t such contradicting instructions create more confusion as opposed to clarity on 1099-K reporting and compliance?
Many such complexities have given scope to malpractice and underreported incomes.
It goes without saying that the changes have been introduced because the federal authorities have observed an influx of hidden income and under-reported income. And let’s not forget how many companies across industries leveraged this simple rule and avoided paying 1099-K taxes for years. As a result, the tax gap was widening (as concluded by a study vouched by the IRS)Primarily, the tax gap of $124 Billion is a major issue that the federal authorities plan to address by introducing these micro measures.
New 1099-K 2022 reporting requirements
1099-K reporting update is an industry-wide change that requires third-party settlement organizations, such as PayPal and Venmo to report payments exceeding $600 made to retailers/merchants/vendors in a calendar year.
The new changes in the 1099-K regime require the third-party networks and payment card entities to file a Form 1099-K for each merchant/retailer/payee to whom they’ve paid $600 or more in a calendar year.
This change also removes the threshold of 200 transactions, which previously countered the 1099-K reporting regime.
How are 1099-K payments different from 1099-NEC payments?
|Form 1099-NEC||Form 1099-K|
|Form 1099-NEC is used for reporting non-employee compensations amounting to $600 or more made to independent contractors in a tax year.||Form 1099-K is used for reporting payments made to merchants and retailers through third-party payment network transactions and payment card transactions with gross total of $600 or more in a calendar year.|
|Payees in Form 1099-NEC: Freelance workers, self-employed professionals, gig workers, and independent contractors who accept payments directly from the hiring entity.||Payees in Form 1099-K payments: Merchants, retail sellers, private sellers, and others who accept payments from their customers through third-party network entities.|
|1099-NEC issuing payers: Fiverr, Upwork, and Lyft||1099-K issuing payers: Venmo, PayPal, VISA, MasterCard, Amazon Pay|
How do the new 1099-K reporting requirements impact your business?
Let’s say that you’re an online seller that sells gifting products. Since you operate online, you accept payments from your customers via PayPal or CashApp, or Venmo, which is a convenient way to accept payments from anyone around the world.
In this context, you’re the merchant business, while PayPal and the like are the third-party entities. When your customer places an order online and pays for the order online, PayPal receives the amount derived from the sale and settles the payment into your account (the merchant’s account).
PayPal (the third-party entity) would need to send a Form 1099-K to you when the gross total of payments crosses the $600 limit.
As a 1099 payments recipient, what’s going to change for you?
The third-party entity will send a Form 1099-K to you for review. You must review and confirm if the information specified in the form is accurate for your case. If there are inconsistencies, you can get the form corrected by contacting the payer.
The payees are not required to file a Form 1099-K. However, they need to report the income received through the third-party transactions in their personal income tax forms.
Payees would also need to furnish their TIN (taxpayer identification number) or its equivalent (social security number or EIN) with their payers along with the legal names through Form W-9. If you’ve already provided the TINs to your payers, you must receive a Form 1099-K from your payer.
When the third-party entities file Form 1099-K with the IRS, the tax authorities review the forms and understand that you have been receiving payments from third-party entities. Merchants and retail businesses that underreport their incomes will be notified/assessed/audited/penalized by the IRS as a result.
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