A simple guide to understand if third-party payments are considered income in the Form 1099-K payments context.
Form 1099-K has been making rounds around the internet. Unlike Form 1099-NEC, Form 1099-K is not a new form but comes with a variety of changes attached to it, which must be followed starting the 2022 tax year.
If you’re an online business, you must already know that Form 1099-K is a regular part of your 1099 regime. You should expect to receive a Form 1099-K if you receive payments from PSEs (Payment Settlement Entities) or TPSOs (Third-party payment settlement organizations) in settlement of third-party online payment transactions.
But are these third-party payments considered income? And if not, how should you treat such payments from a tax compliance perspective?
Let’s take a look at all such questions in detail and understand a few quick facts about Form 1099-K that you’ll find useful.
So, let’s get to it.
Form 1099-K: An Overview
Form 1099-K is an important IRS form that exclusively deals with reportable payments made in settlement of third-party payment network and payment card transactions.
Businesses, online sellers, small eCommerce businesses, and other merchants that use third-party payment apps like Venmo or Zelle to receive payments from their customers are issued a Form 1099-K by the PSE.
Businesses that receive more than $600 in settlement of third-party payment transactions must expect to receive a Form 1099-K from their payers (the payment settlement entity).
Understanding Form 1099-K Payments
Let’s assume that you’re a small business owner who sells limited edition stationary items online.
Customers will place orders on your website and make the payments using convenient payment interfaces like Venmo, PayPal, and other available online methods.
Now, the entity that is “facilitating” these payments is the third party.
Hence, Form 1099-K is connoted with third-party payment transactions.
The payment settlement entity initially accepts the payments from your customers and settles the amount into your bank account.
All such payments that you receive from the third-party payment settlement organization are considered income and must be treated as such.
Role Of Third-Party Payment Settlement Entities
Third-party payment settlement organizations are required to prepare and issue a Form 1099-K to each participating payee to whom they’ve paid at least $600 in settlement of digital payment transactions.
TPSOs must maintain a comprehensive record of all such payments. When the 1099-K is issued to the payee, the merchant business must review the form to check if the reports correspond with the actual payments received from the payer.
Upon consensus, a Form 1099-K must be filed with the IRS by the payer. The payee need not worry about filing a Form 1099-K. However, they may need to pay some tax on the income received through such third-party payments.
How To Treat Form 1099-K Payments Received?
Previously, the IRS required PSEs to only file Form 1099-K if the gross total of reportable payments was in excess of $20,000 along with the transaction threshold consisting of more than 200 transactions.
Note: These reporting requirements are only applicable for calendar years prior to 2021.
With the introduction of the American Rescue Plan Act of 2021, the IRS and the Biden Administration are focusing on streamlining and regulating the third-party payments ecosystem, which is largely contributing to unreported or underreported income in the 1099 economy.
So, to streamline the 1099-K payments ecosystem, the IRS changed the reporting requirements.
For all calendar years after 2021, Form 1099-K must be filed by the PSE if they’ve made at least $600 or more to a participating payee (a merchant).
As a result, Form 1099-K payments are considered to be income for the payee. The merchant business or the payee must use the Form 1099-K report to calculate and pay their income tax.
So, yes. Form 1099-K payments or payments you receive through third-party payment apps like Venmo are considered as income as long as the transaction is in the course of business. And the recipient of such payments is liable to pay a tax on that income.
1099 Reporting: A Changing Landscape
1099 reporting landscape is changing with every new form update and new reporting requirement as published by the IRS.
Just in the past year, the IRS has conveyed that filers may not be able to paper file more than 100 1099 forms (all form types combined) in any given tax year if the proposal is approved. And any excess forms filed by mail, beyond the threshold, will be rejected.
Here, the IRS is encouraging taxpayers to choose the e-filing method.
Form 1099-NEC was also re-introduced in 2020 to report non-employee compensations exclusively.
And let’s not forget how Form 1099-MISC has been reduced to a miscellaneous information reporting form (previously miscellaneous income), which is drastic on its own level.
So, taxpayers need to be prepared for all kinds of changes that will be imposed as the IRS and the federal government see fit to improve regulation and reporting transparency.
How Tax1099 Can Help
With the changing 1099 reporting requirements, there’s also an urgent need for businesses to adapt to the prescribed instructions and file the 1099 forms accordingly.
Thankfully, 200,000+ businesses like yours trust the IRS-authorized digital tax compliance and regulatory reporting enabler – Tax1099 to prepare, validate, and eFile 1099 forms securely.
With Tax1099, your TPSO can easily:
- Edit the 1099-K payment data in real-time with the help of our sleek accounting software integrations.
- Keep your 1099-sensitized data up to date! Make changes to your merchant data without switching platforms.
- Verify merchants with Tax1099’s real-time TIN Matching and make sure that you’re onboarding the right fit for your organization per the compliance standards.
- Prepare and eFile 1099-K forms in bulk effortlessly with automated data synchronization and dynamics of the Tax1099 platform.
Check out our Tax1099 API solution.
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