As part of the American Rescue Plan Act of 2021, the reporting requirement for transactions facilitated through third-party payment networks was lowered to $600 a year. This means if $600 or more was received for goods or services, a 1099-K information return reporting the income would be required to be issued.
This applies to third-party networks like Paypal. The previous requirement was that a 1099-K had to be issued if transactions added up to more than 200 transactions AND more than $20,000.
The new lower requirement was supposed to be implemented for tax year 2022. The IRS has delayed implementation of the reduced requirement. The implementation date has not been determined at this time.
However, it is important to note a few significant points and to know what to do when you receive a 1099-K.
- Some companies issue 1099-Ks even when they don’t meet the required filing threshold. We don’t know at this time if that will be more common, but it seems likely since companies were already preparing to issue more 1099-Ks when the IRS delayed implementation of the change.
- Whether or not you receive a 1099-K does not change the taxability of the income. The income is either taxable or it is not. Taxpayers have a legal obligation to report all taxable income.
- You should keep business transactions separate from personal transactions. This will reduce the likelihood of receiving an erroneous 1099-K. It is difficult enough dealing with the tax information you are supposed to be dealing with, much less documents that shouldn’t be there. For example, if you send money to a relative as a gift, make sure it is through a personal account and/or it is identified as a personal transaction. If you are selling goods and services as a business, make sure that is in a different account than personal transactions and identified as business transactions. Each third-party network may have different processes in place. There is a category of transactions for which taxpayers may receive 1099-Ks now, when they were very unlikely to in the past. This is for the sale of personal property. Some examples are clothing, furniture, and appliances that were used by the taxpayer. We’ll address how to handle receiving a 1099-K for these transactions later.
- While some are hoping Congress will cancel the change, I think we all realize that hoping for Congress to do something isn’t the best plan. So it is best to be prepared for this change when and if the new 1099-K requirement is implemented. It is also a good idea to be ready for what to do when you do receive a 1099-K.
What do I do with a 1099-K?
It is important to remember that one of the primary reasons for information returns like 1099 forms is so the IRS can cross-check and make sure taxpayers are reporting income. This means you shouldn’t ignore a 1099-K, even if you think you should not have received it. Let’s cover a few scenarios.
1) I shouldn’t have received a 1099-K. If the 1099-K wasn’t a business transaction and wasn’t because you sold goods or services, then it is not taxable income and you shouldn’t have received a 1099-K. In this case, the IRS expects you to go to the organization that issued the 1099-K and get them to correct it.
This will likely take time and delay the filing your tax return. If you have moved heaven and earth but still haven’t been able to get it fixed, then make entries on the 1040 Schedule 1 in accordance with IRS guidance that can be found in the form of FAQs. Be sure that the 1099-K was received in error.
2) I received a 1099-K related to my self employment or business. This situation is relatively routine. If you are a sole proprietor or single member LLC (disregarded entity), then you simply file this information with your Schedule C. If you have another business entity and file a separate business tax return, then the income will go with that tax return.
3) I received a 1099-K due to selling personal property. This is the area for which we expect there to be more 1099-K forms to be issued. Folks selling clothes, furniture, and appliances that they used and no longer need is very common.
In most cases, there is no profit from selling these items. Meaning, they are bought for more than they are sold. If you do make a profit, this is taxable income. If you have a loss (sell for less than you bought), you CANNOT deduct the loss due to the sale of personal property from your other income. However, a loss will mean that the money you received for the item is not taxable.
If you have a gain on the sale of personal property, you’ll need to report the sale on a Form 8949. This is similar to how you report stocks. If you have a loss, then you’ll use Schedule 1 of the 1040 to report the transaction.
If you have many transactions, there are ways to group transactions together. The IRS provides some guidance in the form of FAQs on how to do this. The FAQ answer provides the words you should write on the forms.
You should note that the IRS indicates that their own FAQ answers cannot fully be relied upon for taking tax positions. However, their answer for this topic does line up nicely with the tax code.
One final point for this scenario – if you are ultimately reporting less income than shown on the 1099-K, you’ll want to have backup documentation in case of an audit. This backup documentation should be kept with your tax return.
This means that you should have a receipt or other adequate proof if you are saying the dress you sold for $100 had actually cost you $200 (a $200 basis), and so there is no gain and no taxes.
Generally, this means you’ll want something that shows when you purchased the item, how much it was purchased for, and that you paid for the item.
4) I received a 1099-K due to hobby income. Sometimes taxpayers have a little income from a hobby that doesn’t rise to the level of business. Maybe you make candles for fun, and you sold a few of them.
Hobby income also gets reported and unfortunately, under current law expenses for hobby income, can’t be deducted. And if you receive a 1099-K under this scenario, most likely it needs to be reported on Schedule 1 of the 1040.
Usually, in the past for hobby income, you would just enter it on Schedule 1, identifying it as hobby income. Now, it is a good idea to also identify it as 1099-K income, for whatever portion is 1099-K income.
This is so hopefully, any IRS cross-checks will identify the income as 1099-K income being reported and not missed. If the IRS thinks you missed reporting 1099-K income, they’ll kindly send you a letter indicating that they think you owe some back taxes, penalties, and interest. Best to avoid that letter.
If you just found out the 1099-K reporting requirement was changed and then implementation was delayed, you may wonder how you can keep up with tax changes. I’ll give you two ways the IRS provides.
One, you can sign up for IRS newsletters for the topics that interest you. Two, you can actually look at the IRS instructions and publications when preparing your tax returns. At the beginning of each instruction and publication is an update on what’s new. A good place to start for updates in instructions is the 1040 instructions.