This change to information reporting for Form 1099-K is a policy that is part of the American Rescue Plan, which was passed in 2021 and initially intended to increase tax compliance.
Do you use online marketplaces such as eBay, Cash App, Etsy, PayPal, Venmo, StubHub, among other similar apps and third-party settlement organizations (TPSOs) to accept payments?
The IRS has recently announced another delay in implementing the changes to information reporting for Form 1099-K, Payment Card and Third Party Network Transactions. The implementation of the new law that requires TPSOs to issue a Form 1099-K to anyone who received more than $600 in a year will move from the 2023 tax year to tax year 2024.
This change to information reporting for Form 1099-K is a policy that is part of the American Rescue Plan, which was passed in 2021 and initially intended to increase tax compliance. Presently, TPSOs such as Venmo, Cash App, Etsy, StubHub and Airbnb are required to provide individuals (and the IRS) with a Form 1099-K if they received more than $20,000 in the current tax year and had completed more than 200 transactions in the calendar year. This policy was originally supposed to be implemented in 2023 and change 1099-K information reporting by removing the transaction requirement and reducing the $20,000 threshold down to $600.
On November 21, 2023, in Notice 2023-74, the IRS decided to further delay the implementation of this reporting change until the 2024 tax year and increase the $600 threshold to $5,000. This is a positive development for most taxpayers, as those with more than $600 but less than $5,000 in transactions will not experience this new tax reporting to the IRS until tax year 2024.
However, even with this delay, the new reporting rule creates a tax dilemma. While the intent of this rule was designed to capture the income received for goods and services in a trade or business (which often have gone unreported), it was not intended to apply to personal transactions such as birthday or holiday gifts, sharing the cost of a car ride or meal, or paying a family member or another for a household bill. These payments are not taxable and should not be reported on Form 1099-K.
Even the IRS recognizes that the casual sale of goods and services, including selling used personal items like clothing, furniture and other household items for a loss, could generate a Form 1099-K for many people, even if the seller has no tax liability from those sales.
This complexity in distinguishing between these types of transactions factored into the IRS’ decision to delay the reporting requirements an additional year and to plan for a threshold of $5,000 for 2024 in order to phase in implementation.
With this favorable delay in the Form 1099-K reporting, we recommend proactive planning to make sure you will be prepared and not over or underreport your taxable income or loss. For example, individuals and businesses who do not have a dedicated business account could run into the issue of improperly comingling personal and business transactions. Venmo allows you to specify each transaction as a “Family and Friends” transaction or a “Goods and Services” transaction. Only the transactions that are listed as Goods and Services would be taxable and reported to the IRS. The Family and Friends transactions would not be taxable or reported to the IRS, but could be subject to reclassification upon IRS examination. While this is a great feature on the Venmo platform, not every service has this feature. As some of the services do not categorize transactions as business or personal, it raises potential issues. The IRS, upon audit, could incorrectly count personal transactions as business-related and improperly inflate taxable income. Conversely, whether you receive a Form 1099-K in 2023 or 2024, the IRS requires that all taxable income be reported, even from “side hustles.” The risk of misreporting your taxable income or loss is mitigated by contemporaneous and accurate recordkeeping, as we continually advise clients. Maintaining contemporaneous and accurate records allow for proper differentiating of business and personal transactions. As everyone’s tax situation is uniquely different, you should consider speaking with us or your tax adviser to find out how these changes may affect you and your business.
For More Information
If you would like more information about this topic or your own unique situation, please contact Steven M. Packer, Joseph E. Schuler or any of the practitioners in the Tax Accounting Group. For information about other pertinent tax topics, please visit our publications page.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.