A major legislative change in tax reporting is one of the provisions of the American Rescue Plan, which was enacted in March of last year.

If you are a small business owner who files taxes as a sole proprietorships; partnership; LLC or  corporation and earn more than $600 via online payment platforms, you will soon start receiving a Form-1099-K, “Payment Card and Third-Party Network Transactions” (TPSOs and EPFs).  The information you provide on this form will be sent to your client and the IRS.  As a result, your clients will, in some cases, receive a slew of these forms in early 2023.  Third-party processors such as Venmo, PayPal, Cash App, Zelle, or other vendors, will be providing these forms for you to complete and return. In addition, if you sell products via Amazon, Etsy, eBay, or at craft shows or face-to-face, you will receive the 1099-K. 

This is a substantial change from prior periods, in which the 1099-K would only be generated when the amount paid to a single payee exceeded $20,000 per year and if there were more than 200 transactions during the same period.  This change means that “gig” workers and individuals that rent out residential/vacation properties and collect payments via 3^rd party vendors will, for the first time, receive the 1099-K document, and in some cases, will create a taxable event for those recipients.

However, transactions for gifts, charitable contributions, and reimbursements are excluded from this requirement.  If you have historically comingled business and personal cash collections, you are strongly encouraged to separate these ASAP to prevent confusion in future periods.  In addition, in that the 1099-K may include taxable and nontaxable income, good record keeping is essential.  This should include:

• Bank statements
• Receipts
• Invoices
• Other financial documents that reflect taxable income

This is yet another reason to operate your businesses independently of your personal transactions.

Operationally, a Form 1099-K filer must report the gross amounts of reportable transactions for each month and for the entire year in separate boxes on the Form 1099-K.  In addition, a filer must obtain each payee TIN before making a reportable payment or the filer must impose backup withholding at a rate of 24% on the gross amount of the payment. 

Collecting the data has yet to be finalized, especially regarding the collection of the TINs, but you need to be aware that you may be required to provide this to your transaction vendor to avoid backup withholding and other penalties. 

Also, independent contractors who receive more than $600 via a payment service will probably get both a 1099-MISC from the company as well as a 1099-K from the payment service, which will probably be a point of confusion for some recipients. 

Finally, starting with tax year 2022, you will need to be sure to consider the amounts shown on your combined 1099-K forms when calculating gross receipts for your income tax return. 

Bottom lines are:

• You need to be vigilant in compiling this data or you could end up owing additional taxes and penalties
• You need to get sound advice from your accountant or tax advisor. 

Welcome to 2022!