1099-K Implementation – New $600 Threshold for 1099-K Reporting

By Tia Cardine Owner, S. Cardine, CPA

The year 2023 marks a significant change in the way businesses report income and transactions to the Internal Revenue Service (IRS) in the United States. The 1099-K form, often used by third-party payment processors and online marketplaces such as Paypal & Facebook, is undergoing a series of updates that will have a far-reaching impact on businesses and independent contractors. In this article, we will delve into the changes in 1099-K implementation in 2024 and discuss how they will affect various stakeholders.

Background on the 1099-K Form

The 1099-K form is used by payment settlement entities, such as credit card companies and online marketplaces, to report payments made to businesses and individuals. It was introduced in 2011 as a means to help the IRS track electronic payment transactions and ensure that income is accurately reported and taxed. Over the years, the 1099-K form has seen several revisions, but the 2023 update represents a significant overhaul.

Increased Reporting Threshold

One of the most notable changes in the 1099-K implementation is the increased reporting threshold. In previous years, payment processors were required to report transactions to the IRS if they exceeded $20,000 or comprised more than 200 individual transactions in a calendar year. Starting in 2023, this threshold has been decreased to $600, and the 200-transaction threshold has been eliminated. This means that payment processors will need to report all transactions that meet or exceed this new threshold.

Expanded Reporting Categories

Another key change in the 1099-K implementation is the expansion of reporting categories. Previously, the form primarily captured credit card transactions. In 2023, it will also encompass electronic payments, third-party settlement transactions, and any other payments that were not previously reported.

Impact on Businesses and Independent Contractors

For businesses and independent contractors, these changes will have a significant impact on their tax reporting obligations. Smaller businesses and freelancers who may not have reached the previous $20,000 threshold will now be subject to 1099-K reporting. This means that a wider range of income sources will be scrutinized by the IRS.

Businesses will need to ensure they have accurate and up-to-date records of all their income sources to comply with the new regulations. Independent contractors, gig workers, and freelancers will also need to be vigilant about tracking their income to avoid potential discrepancies in their tax returns.

Stricter Compliance and Penalties

The IRS is expected to enforce the new 1099K reporting requirements more rigorously. Failing to report income accurately can result in penalties and legal consequences. Therefore, businesses, payment processors, and independent contractors must be diligent in ensuring compliance.

Preparing for the Changes

To adapt to the 1099-K changes in 2023, businesses should consider implementing robust accounting and record-keeping systems. This will help in accurately tracking income and ensuring compliance with the new reporting requirements. Seeking the assistance of tax professionals or software solutions that can automate income tracking and reporting may be beneficial.

What does this mean for you?

A robust accounting system should be implemented for business transactions for business owners and independent contractors. These groups should also ensure that bank accounts for business and personal transactions are kept separate to ensure accurate tracking of income and compliance requirements. Seek the assistance of tax professionals or software solutions that can automate income tracking and reporting.

Many of us use these platforms to send and receive money from family and friends for reimbursement. According to the IRS website, these transactions are not taxable. However, sales of personal items (i.e., washer & dryer) are taxable, and losses are not deductible.

What to do if you receive a 1099-K?

If you receive a 1099-K for amounts other than business-related, contact the issuer as soon as possible. The FILER Information is included in the top-right corner of the 1099-K. Be sure to keep a copy of receipts for personal items that you may resell to establish value.

The 1099-K implementation represents a substantial shift in how income is reported to the IRS. Businesses, payment processors, and independent contractors should prepare for these changes by updating their accounting practices and ensuring accurate income reporting. Staying informed and compliant with the new regulations will be essential to avoid potential penalties and legal consequences. Please consult with a certified public accountant or other tax professional to assist with accurate accounting and compliance with the new requirements.

For additional information, visit www.thecardinegroup.com. Instagram @Tiacardinecpa.