Form 1099-K: Understanding what the IRS wants you to know

The American Rescue Plan Act of 2021 lowered the threshold for reporting third party network transactions from aggregate payments exceeding $20,000 to aggregate payments exceeding $600 during the calendar year and eliminated the 200-transaction threshold for reporting third party network transactions entirely with respect to Form 1099-K. Although the IRS announced in late 2022 that the calendar year 2022 was going to be treated as a transition year for the reduced reporting threshold of more than $600, the $600 reporting threshold will start with tax year 2023.  On 6/26/23, the IRS redesigned its webpage: “Understanding Your Form 1099-K” to include important information on Form 1099-K topics. All Taxpayers ought to understand that third party information reporting for certain income is required by law. The IRS sentiment  is that third party information reporting has been shown to increase voluntary tax compliance, improve tax collections and assessments within the IRS, and thereby reduce the tax gap.

Form 1099-K

It is an IRS information return that is used to report certain payment transactions with the purpose of improving voluntary tax compliance. The Form is issued for payments that are received from:

• Card transactions (debit, credit, or stored-value cards such as gift cards), and/or
• In settlement of third-party payment network transactions (payment apps or online marketplaces) above the minimum reporting threshold of $600.

Third-party payment networks are required to file Form 1099-K with the IRS and provide a copy to the taxpayer by January 31^st when the gross payment amount is more than $600. It should not report gifts or reimbursement of personal expenses that the taxpayer received from friends and family.

Who can receive Form 1099-K?

Taxpayer that received any payments with payment cards that include credit cards, debit cards and stored value cards (gift cards) and;

Taxpayers that received payments over $600 via a Payment Application (Venmo, PayPal, Zelle, Apple Wallet, etc.) or and on-line marketplace (Etsy, eBay, Airbnb, UpWork, etc.); including payments for a personal item sold or for goods sold, services provided, or property rented through any:

• Peer-to-peer payment platform or digital wallet
• Online marketplace (sale or resale of clothing, furniture, and other items)
• Craft or maker marketplace
• Auction site
• Car sharing or ride-hailing platform
• Real estate marketplace
• Ticket exchange or resale site
• Crowdfunding platform
• Freelance marketplace

 What Should NOT Be Reported on Form 1099-K?

Gifts or reimbursement of personal expenses from friends and family should not be reported on Form 1099-K.   Examples are sharing the cost of a car ride or meal, receiving money for birthday or holiday gifts, or getting repaid by a roommate for a household bill.  These types of payments are not payments for goods or services, and they are not taxable income.

Form 1099-K is an information report, and it is meant to assist the Taxpayer in reporting their correct income on their tax return

Form 1099-K is reported to the IRS.  Taxpayers that do not include the information provided on Form 1099-K on their tax return run the risk of owing additional taxes on unreported income and receiving retroactive charges, penalties, and interest from the IRS.  In addition, not reporting earnings correctly puts a taxpayer in a potential audit risk situation.

Who is your Tax Preparer? ©