By Janet Hagy, CPA-Austin
Third-party payment networks, like PayPal and credit card providers, are required to track and report monthly totals for goods and services sales via an annual Form 1099-K. TXCPA has been advising that many taxpayers will be caught unaware in early 2024 when a 1099-K arrives reporting small amounts of income from sales of goods and services. The changes originally scheduled for 2022 by the provisions of the American Rescue Plan Act of 2021 go into effect for 2023. Prior to 2023, Form 1099-K was only issued if the third-party network made annual payments of more than $20,000 and there were over 200 transactions. For 2023, if gross receipts exceed $600, Form 1099-K is required regardless of the quantity of transactions. Can we just take a moment and ask, “What were they thinking?”
The gross amount reported can include sales tax collected, fees or reimbursements that may not be taxable. It may also include duplicated income if the taxpayer received Forms 1099-MISC or 1099-NEC from a customer or client reporting the same gross receipts. Taxpayers with no reportable business income may receive an erroneous Form 1099-K if the payer identified the payment to the taxpayer as business related.
If a taxpayer does not receive an expected Form 1099-K for the business from a third-party network, the taxpayer needs to contact the third-party and obtain a copy. The IRS will be matching the reported gross receipts to the tax return. Reconciliation of Forms 1099-K to reported gross receipts during the tax preparation process is even more important for 2023 than in the past due to potential IRS inquiries for relatively small differences.
Preparers will be guiding taxpayers through the reconciliation and tax return reporting processes. Due diligence requirements will necessitate inquiries about previous years’ activities if unexpected Forms 1099-K arrive with 2023 tax documents. Ethical dilemmas about amending prior year returns for previously unreported business activities could arise. More professional time will undoubtedly be spent.
Due to this change, the 2024 tax filing season promises to be filled with surprises. Notifying clients and their accounting/bookkeeping professionals now about this change in 1099-K reporting threshold and the related increase in expected tax preparation costs may eliminate some 2024 headaches.
TXCPA and AICPA believe that a $600 1099-K threshold is overly burdensome to taxpayers and tax professionals. TXCPA is communicating closely with AICPA on any sound legislation before Congress that would raise the threshold. A pending bill, H.R. 190 Saving Gig Economy Taxpayers Act, would modify requirements for third-party settlement organizations to eliminate their currently untenable reporting requirement with respect to the transactions of their participating payees. This is moving in the right direction, but it does not go far enough. Unfortunately, Congress may want a “pay-for” to increase the new threshold.