Regardless of your job status, a freelancer, self-employed, or are part of the gig economy, you must be aware of the new 1099-k requirements for 2022 introduced by the Internal Revenue Service (IRS) regarding the third party network transactions reported on Form 1099-K for 2022 and beyond. This form is used to report payments accepted from payment settlement entities (PSEs) that handle third-party network or payment card transactions. PSEs are third-party network transactions from providers such as PayPal, Venmo, Zelle and payment cards from debit, credit, and prepaid credit cards.
1099-K Requirements in 2023: What Changed?
In the past, you’d receive Form 1099-K if:
- You received any payment from payment card entities, irrespective of the amount
- You received $20,000 and more than 200 transactions from third-party networks
However, with the beginning of the tax year 2022, the threshold of 200 transactions is removed entirely.
In 2022, you’ll receive Form 1099-K if:
- You received $600 or more from payment card entities and third-party network transactions with no minimum transaction threshold
- The requirements for payments card transactions, however, have not changed.
This year, PSEs that process debit cards, credit cards, or prepaid credit cards on your behalf and PSEs that process more than $600 in third-party network transactions must present a 1099-K Form to you.
A few crypto exchanges started to provide 1099-K to investors who performed transactions of $20,000 and more than 200 transactions (now more than $600 with no minimum transaction threshold). However, the 1099-K only reports the total value of transactions which makes determining the taxable gains a bit challenging. This confusion can also lead to overpayment of taxes on the taxpayer’s part.
However, if you’ve received the 1099-K Form, so has the IRS. This form signals the IRS that you have traded in cryptocurrency and thus you have to report crypto on your tax return. The 1099-K doesn’t report individual transactions, just the collective traded amount. To calculate your crypto taxes accurately, you need to report each transaction or any other transaction from any crypto exchange. If you fail to do so, you might come under the scrutiny of the IRS.
1099-K Reporting Requirements For Income Earned in 2021
For the income earned in the tax year 2021, you should receive Form 1099-K from PSEs that process:
- Debit, credit, prepaid credit card transactions without any threshold
- Third-party network transactions that are worth more than $20,000 and exceed 200 transactions.
The date of the transaction is paramount in calculating gross reportable payment and this payment does not encompass adjustments for cash equivalents, fees, credits, refunds, or any other amounts.
1099-K Requirements for 2022
For the income earned in the tax year 2022, you should receive Form 1099-K from PSEs that process:
- Any payment card transactions with no threshold
- Third-party network transactions that are worth more than $600 with no minimum number transaction threshold
The date of the transaction is paramount in calculating gross reportable payment and this payment does not encompass adjustments for cash equivalents, fees, credits, refunds, or any other amounts.
1099-K Requirements for 2023 – Things to Remember
After receiving the 1099-K Form from the PSEs, review your payment card and third-party network transaction statements to confirm the gross reportable payment. Once confirmed, you have to report business expenses on the tax form that you’d normally file.
- If you are a sole proprietor, you have to record information on Form 1099-Ks as income and on Schedule C, you have to report and deduct fees or other business expenses. Similarly, rental activity-related amounts are reported on Schedule E and farming-related amounts on Schedule F.
It is important to remember that the gross reportable amount on Form 1099-K does not include adjustments for cash equivalents, fees, credits, refunds, or any other amounts. Corporations and partnership firms report their gross revenue on their income tax return on Form 1099-K.
- If your business has multiple sources of income, you might have to report the amounts on more than one line, schedule, or return on the 1099-K Form. For instance, you have rental income along with earnings from a retail business and you use a single credit card terminal for both projects, you have to include your credit card receipts for both on your 1099-K. Also, you have to depend on your acute ‘recordkeeping’ skills to correctly report gross rental activity total on Schedule E, and retail receipts on Schedule C.
Non-reportable transactions:
- If you withdraw money from an automated teller machine (ATM) with a payment card
- If you issue a check connected with a payment card and that check is accepted by a merchant or other payee
- If you pay for a transaction with a payment card and the merchant or other payee is related to the payor
Why is Important to Record Your Transactions?
With the new 1099-K requirements for 2022, it is more important than ever to be on top of all the deductions available to you and their proper claiming process. Why is this important? Because the gross reportable amount that you have to file on the 1009-K is the total unadjusted amount of the payment made to you. This amount should not be adjusted for any refunds, fees, or any other amount before it is reported to the IRS on the 1099-K. This means that the 1099-K Form exhibits transactions of the past year processed for you as well as any expenses paid by your client on your behalf like the processing fee deducted before the payment reaches you.
If you provide cashback to your customers when they use their debit cards, you need to mention the cashback amounts as a part of the gross amount of payment card transactions. And that’s why it is important to maintain a record of customer cash back activity during the term of the tax year.
The American Rescue Plan Act and Form 1099-K
The changes made to the 1099-K are mandated by the American Rescue Plan Act (ARPA) and they have clarified that third-party network reporting is only applicable to the transactions for goods and services. The confusion of whether the third-party networks involved transactions other than goods and services persisted since the first use of the Form 1099-K in 2012. The confusion took place because of the definition of “any transactions settled via a third-party payment network.” ARPA also makes it clear that payments for rents, royalties, and other types of transactions settled via third-party networks are supposed to be reported on Form 1099-MISC, and transactions related to goods and services should be reported on 1099-K.
If you are using PSEs such as PayPal and Venmo, you can choose the category of your peer-to-peer transactions as either personal/family or friends or goods or services. You must select Goods and Services when you are purchasing an item such as buying a couch from local classified ads or paying for a service. The goods and services payments are protected by the PSEs Purchase Protection Program and are designed to provide coverage if the transaction doesn’t go as expected.
ARPA has significantly impacted the use of 1099-Ks because as per the mandate, PSEs are required to file this form each year. Additionally, if third-party networks process your payments, you should monitor those payments and ensure that they are issued a 1099-K. If they didn’t, you must contact the third-party network and resolve the issue.
PSEs such as PayPal and Venmo may ask their users to present their Individual Tax ID Number (ITIN), Employer Identification Number (EIN), or Social Security Number (SSN) to their tax information. General businesses use an EIN whereas individuals and sole proprietors use SSN or ITIN.
View more details on JCT.
Final Thoughts
As freelancing and the gig economy continues to expand, new rules are essential for the IRS to oversee these changes as they affect people’s income even if they are not their primary source of income. Lastly, it is always advisable to seek the help of a tax professional if you are confused about the 1099-K reporting requirements.
