Skip to main content

How Can the Changes in 1099-K Reporting Requirements Affect Your Tax Return?

By June 2, 2023January 30th, 2024Business Tax Items
1099-K Reporting

A 1099-K is a tax form used to report income received through payment settlement entities, such as third-party payment processors like PayPal, Venmo, Zelle, or Stripe. It is typically issued to individuals or businesses who have processed a certain volume of transactions or received a certain amount of income through these platforms. But how will the 1099-K Reporting Requirements change affect your tax return?

Congress is lowering the reporting threshold from $20,000 to $600. They are also eliminating the number of transactions threshold. Before, it only applied if the number of transactions exceeded 200. People who didn’t receive a 1099-K Form before will start receiving one and more credit-processing businesses will be required to send them out.

What is the 1099-K Form For?

The purpose of the 1099-K form is to provide information to IRS about the income generated by individuals or businesses through electronic payments. It helps the IRS track and ensures accurate reporting of income, particularly for those who receive income through online platforms.

The 1099-K form reports the gross amount of payment transactions received by a person or business during a calendar year, however it does not include processing fees.

Reporting this income is necessary for several reasons like tax compliance, income verification, third-party reporting, matching income and expenses, and, data analysis and enforcement. It’s important to note that the specific reporting requirements and thresholds for the 1099-K form may vary over time, so it’s always recommended to consult the official IRS guidelines or seek advice from a qualified tax professional like ourselves for the most up-to-date information.

What are the Modifications Made in 1099-K Reporting?

In the past, the threshold needs to reach a total gross amount of payments that exceed $20,000 or a total number of transactions that exceed 200 within a given year. With this new modification, the threshold has been reduced to $600 regardless of how many transactions were made, identical to the 1099-NEC and 1099-MISC filing requirements.

How Will This 1099-K Reporting Modification Affect Taxpayers?

Since the threshold has been lowered, the main issue is the number of people who shall be receiving the form. Most of them typically did not receive the form before and it may come as a surprise. This also means more credit card processing businesses will be required to send the form out to these individuals.

If you make business transactions using your PayPal, Square, Venmo, eBay, Cash App, and other accounts like this you could receive a 1099-K Form from these companies. On that form, you will be told the gross amount you have received and you need to report taxes based on that said amount.

What Problems are Involved with the Modification of the 1099-K Reporting?

Let’s say you sold a car for $1,000. You receive payment via Venmo. Depending on the account status Venmo will most likely issue you a 1099k at the end of the year for this amount. Now the issue is Venmo doesn’t always know if this was a business or personal transactions or show you how much came out in fees. This means they could be potentially reporting income that shouldn’t be taxable to you or not providing information related to your cost basis of  the item sold.

Cost basis refers to the original value or cost of an asset for tax purposes. It is used to determine the capital gain or loss when the asset is sold or disposed of. The cost basis is important because it helps calculate the taxable gain or loss on an investment, which is the difference between the selling price and the cost basis.

Cost basis is important because it reduces how much tax you have to pay. Let’s say I purchased a desk for $800 and I intend to sell it for $1,000. When the buyer purchases the desk for $1,000 and sends their payment via Venmo, I will be given a 1099-K Form saying I have received $1,000. When I file for my tax return, the 1099-K Form does not specify how much I initially bought the desk for. In reality, I only received $200 that needs to be taxed.

Another issue in this modification affects business owners. If I were to pay $1,000 for marketing services, the receiving business is to pay taxes on the said $1,000 that I have provided. If that business has already accounted for that $1,000 but I paid them through Venmo, the business is still going to receive a 1099-K Form for that $1,000. It will be an issue of double entry and it will look like you have made $2,000.

One more thing to worry about is the fees that these applications charge. With the new modification, it does not account for any offset like fees, refunds, or chargebacks. One solution for this is to acquire bookkeeping services to keep everything on track.

How Does the Modification in 1099-K Reporting Affect Payments to Family and Friends?

This is where it gets messy for a business like Venmo. It is going to be tedious for businesses of this nature to decipher what the money is intended for. They will start asking questions like; is this a business transaction? Who are you paying? What is this for? This way they can try to classify the payment correctly and determine if the payment needs to go on a 1099-K Form. Personal transactions are not supposed to be recorded.

Another cause for concern is transactions between family members. Let’s say I send my sister $1,000. Is Venmo going to report that on the 1099-K form? Trying to figure out what the funds are for can be quite confusing. It is important to ensure that people are not paying taxes on things that they do not need to pay.

What is the IRS Doing About the Possible Issue that Will Arise in the Modification of the 1099-K Reporting?

The IRS is potentially looking at pushing back the deadline for the implementation of these changes. It was supposed to start in 2022 and they moved it to 2023. We are hopeful that they just completely disregard it or push it back to start in 2024.