The IRS is lowering the transaction threshold for 1099-K reporting 2021 with a view to streamline 1099 reporting and tax compliance.
What You Need To Know About The Updated 1099-K Threshold?
As you may already know, the IRS is streamlining its reporting and compliance regulations in order to improve the accuracy of reporting and tax transparency. The IRS has recently introduced a couple of changes to the 1099-K reporting.
This change comes after President Biden signed the American Rescue Plan Act of 2021 (ARPA) into law on March 11th, 2021. According to Forbes, the bill specifies the minimum threshold has been lowered for Form 1099-K, a form filed by the Payment Settlement Entities (PSEs) to report gross amounts of all reportable payment transactions.
This law will become effective in 2022 and will impact the January 2023 filings.
- Here’s how the IRS defines a ‘Payment Settlement Entity’
- View the revised IRS Form 1099-K
- Updated IRS Instructions For 1099-K Reporting And Filing
Form 1099-K Threshold Lowered From $20,000 To $600
Prior to the update, the IRS required the payment settlement entities to report all the payment transactions amounting to at least $20,000 in a year with a transaction limit of up to 200 (per customer). The PSE has to send a copy of Form 1099-K to the IRS and the recipient (or customer).
It is also important to note that transactions that aren’t related to goods or services (such as earnings on Bitcoin) are exempted from this new rule.
Form 1099-K Requirements 2021
Now, if you are a Payment Settlement Entity, this new update means you are required to file a 1099-K and send a copy of the form to the IRS and the customer for processing transactions amounting to $600 or more in a year.
The transaction amount has been lowered from $20,000 to $600. The transaction limit has been lifted with the new update.
Why Is The 1099-K Threshold Lowered?
According to this study conducted by the IRS Tax Gap, about 80% of the gig economy workers who earn less than $20,000 in a year from a company don’t receive a 1099-K. This means thousands of gig workers are misreporting their incomes, which is resulting in misreported and/or underreported income.
It is also important to note that until the CARE Act forced the separation of nonemployee compensation reporting from the 1099-MISC, some employees were losing unemployment benefits like health insurance in the middle of a global pandemic.
Estimating the gig economy and its rising impact on the overall economy is the need of the hour. By implementing this new rule, the IRS and the government plan to get a clear picture of the gig economy and introduce appropriate revolutions.
PSEs must understand that reporting these transactions helps ensure tax transparency, which further helps the IRS generate revenue. This revenue is used for the welfare and development of the U.S.
What Does This 1099-K Change Mean For You?
If you’re a contractor or an entrepreneur or a company that uses e-commerce platforms like e-Bay to sell or resell products or services, the Payment Settlement Entity (think PayPal or your Credit Card Operator) is involved between you and the e-commerce company would send you a 1099-K form.
You will have to read and validate the transactions and adjust your reports accordingly. What may be treated as an income by the merchant entity may not be an income for you. So, you have to be extra conscious about your 1099-K reports and maybe even get expert tax advice from a tax professional.
How Does New 1099-K Threshold Affect Your Previous Filings?
If you’re a Payment Settlement Entity, then it’s probably a good idea to audit the incomes you have generated previously through online and debit/credit card transactions.
If you’re a contractor who sells products on app-based companies like Etsy, ask for a 1099-K from the PSE.
States That Have Adopted The New 1099-K Threshold Rule
Some states have already implemented this rule. So, if you’re operating from the following states, then you must file 1099-K and send the copies to the IRS and the recipient to avoid non-compliance issues.
- Washington D.C
- New Jersey
How To Streamline Your Form 1099-K Filings?
If the gross payment volume from sales of goods or services in a single calendar year is $600 or more, then you are required to report the same in Form 1099-K.
Further, if the recipient has not provided you their TIN, you must withhold taxes from their payments and report the same in your 1099 forms.
Tax1099 has added the 1099-K form to its Form Directory to help you e-file 1099-K easily. However, since the threshold for some states (which have already adopted the new rule) varies, it is best to check the state requirements and plan your e-files.
Check state-wise 1099-K requirements here
The good news is that you have enough time to gather your previous files and reports. Document all transactions from now on to ensure accuracy in your tax reports.
Get tax assistance for your 1099-K filings from Tax1099 here
Come back to this space for more updates on 1099 forms and related topics.