Topic - Savings Tools
Published by| 9/10/22
Do you or your business receive payments from apps like Venmo or PayPal? Or do you use an online platform such as Airbnb or Etsy to generate income?
If the answer is yes, then read carefully because there are new tax rules that apply to the reporting of payments from third party platforms.
A 1099-K is a tax form that the IRS required for third party platforms to report business transactions. These would be issued to the IRS to properly report the platform's transactions, and also directly to the client (business or individual) so they could properly report their taxes.
Previously, those platforms were only required to issue a 1099-K if the client received payments totaling over $20,000 in the year, or had more than 200 individual transactions. For many clients of these platforms, that means they were never issued a 1099-K and are unfamiliar with what it means to them.
For the 2023 tax filing season, the IRS has changed the threshold for 1099-K reporting to just $600 in transactions over the course of a year. Obviously, this massive difference in the dollar amount threshold will create an enormous amount of 1099-K reports compared to previous years.
Large platforms that only had to issue reports for the largest clients will now have to issue exponentially more filings for all the smallest of clients due to this much lower threshold.
This Is Not A New Tax
To be clear, the new rule is not changing the tax responsibility for anyone involved. There are no new taxes being applied either to the platform or to the clients.
What the new 1099-K reporting is specifically targeting are businesses or individuals who were evading taxes by not reporting these forms of income properly.
Taxpayers that fell under the previous threshold might not have been properly reporting that income in previous years. With the new threshold requiring the reporting of income at a much lower level, a much larger percentage of the platform's clients will be required to properly report their income from these sources.
Potential Confusion Caused By 1099-K Reporting
In addition to the major platforms drastically increasing their filing responsibility by needing to file a much greater number of 1099-K reports, there is also the potential for confusing among the clients who are likely to receive a 1099-K for the first time.
As with any business or self-employed individual filing, the taxpayer receiving the 1099-K will need to take the gross amount of payments and work out what are the legitimate deductions in order to get their correct taxable portion of income. This can be confusing if you are not exactly sure what deductions you are allowed to make, and from which amounts to deduct them.
If you are a taxpayer who uses these online platforms for payment and receive a 1099-K this upcoming tax season, we highly advise seeking a tax professional to assist you with proper filing so that you can properly deduct your expenses and limit your tax responsibility to the proper amount.
Are There Any Exceptions
At this time, the platform Zelle has not been included in the 1099-K reporting rule because it functions fundamentally different from most of the other platforms. Zelle functions as a messenger between banks, rather than an account holder. However, the IRS has other forms (1099-MISC, 1099-NEC, etc) that are required for those types of transactions, so they are still responsible for accurately filing relevant transactions.