There’s a little-known tax form that has been around since 2010 that many will be surprised to see arrive for 2022 tax filing. It’s known as the 1099-K and was created to report business income on the tax return of the business or on Schedule C for self-employed individuals, but that’s set to change. For the past 11 years, there was a de minimis exception to filing the 1099-K when there were 200 or fewer transactions with an aggregate gross amount of $20,000. However, starting in 2022, the American Rescue Plan Act lowered the de minimis amount to $600 with no minimum number of transactions. While still there to target businesses, many individuals who don’t own businesses will now receive a 1099-K and be required to report it as miscellaneous income.
The 1099-K can be triggered when you use a third-party system to process payments (like Venmo, PayPal, etc.). This happens when the third-party system is tied to an underlying credit card payment. For example, if you use Venmo, but the Venmo payment is facilitated via the credit card you have linked to Venmo, once you receive over $600, you may get a 1099-K. Likewise, if you first established your Venmo account as a business (vs. personal) account, personal transactions (like splitting a dinner tab with friends) run through that account may now trigger the 1099-K. Not included in reporting are direct payment apps from your bank (i.e. Zelle) as those are not tied to a credit card.
The American Rescue Act technically restricts the issuance of 1099-K when there are $600 or more of transactions involving goods and services, but the reality is that the payment systems may mistake personal use (like splitting a dinner) vs. business use and will likely send the 1099-K just in case. Wonder why a service like Venmo asked you to confirm your Social Security Number earlier this year? Now you know. If your payment service gives you the option of specifying that the payment is personal, be sure to make that election as that will help avoid receiving a 1099-K.
For business owners, there can be an added headache. In some cases, the client paying a business will need to issue a 1099 to that business. For example, if you have some work done at your office and pay a contractor to do the work via the office, the office is to provide a 1099 to the contractor for the payment made. If that payment was then made via a third-party system, the contractor may now also get a 1099-K for the transaction. This would result in dual 1099s for the same job. If your business is showing more in 1099 income than business receipts, the IRS could use that as a reason to audit your business.
Even simple things like selling something online (eBay) can trigger the 1099. Historically, you’ve been required to report profit from these sales. However, the 1099-K will cover the full amount of the sale as income vs. the profit and you’ll be tasked with how to prove it.
There’s still time for Congress to fix this pending tax quagmire by going back to the 200 transaction/$20K trigger or raising the bar well-above $600. If not, watch how you make payments as they could cost you on your tax return. If you receive a 1099-K for 2022, be sure to review it with your tax professional and include it on your 2022 return. If you feel you received a 1099-K in error, you must address that with the issuer of the 1099-K vs. the IRS. Hope Venmo has a well-staffed call center!
For more information, you can visit this link on Understanding Your Form 1099-K from the IRS: