Selling anything online? Using a credit card machine or online payment portal to receive customer payments for your small business or side hustle? The 2021 American Rescue Act could potentially cause increased reporting requirements and tax for small business and individuals.
What is a Form 1099-K
Form 1099-K Payment Card and Third-Party Network Transactions is a tax form that many small businesses are familiar with. This form is used to report payments that are received from third-party settlement organizations. These are organizations that facilitate credit and debit card transactions between two parties. They are normally not banks. Below is a copy of the 2022 form.
Changes for 2022 Tax Year
Prior to 2022, the monetary threshold to receive a 1099-K was $20,000. This includes a requirement of 200 sales related transactions. If both requirements are met, then a 1099-K should be received.
The American Rescue Plan Act that was passed in 2021 changed these requirements. Now, anyone who sells more than $600 in merchandise, using any number of transactions, even just one, should receive the newly revised Form 1099-K.
|2021 Tax Year
|2022 Tax Year
Any Number of Transactions
Clients who normally receive the majority of their customer payments from either credit cards, cash, or checks will most likely be unaffected since it is highly likely they already receive a 1099-K for the credit card transactions.
Clients who use third-party settlement organizations to receive their income are the ones that will be affected by the changes. Companies such as Zelle, PayPal, Square, Stripe, Venmo, and many others will be sending a 1099-K if there were more than $600 received in payments throughout the year. Uber and Lyft are also considered third-party settlement organizations. Which means that anyone who works for Uber or Lyft, that also receives more than $600, will be receiving a 1099-K.
The American Rescue Plan does not specify that reporting requirements are limited to goods and services only. It is not supposed to affect any funds that may be received from friends and family, but unfortunately, there is no way to tell the difference between family, friends, or work-related transactions at this time. This means there is a possibility of a 1099-K being received in error for some individuals.
Problems with this Change
Individuals who have sold small amounts of merchandise on eBay, Etsy, Facebook, or other selling platforms may find themselves needing to report extra income and pay increased taxes.
The Form 1099-K does not include credits, discounts, fees, or returns in the total that is reported. The individual will need to expense these items separately and keep an accurate record for taxes and finances which may results in more individual tax filers finding themselves required to file a Schedule C for business related income to report this on their individual tax returns.
From an accounting standpoint, more small business clients, and possibly more individual tax clients, will be including a 1099-K with their year-end documentation for taxes. Below is the deadline for reporting and sending these forms for the tax year 2022.
|January 31st, 2023
|February 28th, 2023
|March 31st, 2023
Cut Red Tape for Online Sales Act
There is however, a bill that was introduced in Congress on March 15th, 2022, to raise the threshold from $600 to $5,000. This bill is called the Cut Red Tape for Online Sales Act.
Many are worried that the low threshold of $600 will lead to overreporting of income and overpayment of taxes. This could render some taxpayer’s ineligible for certain tax benefits. This will also lead to increased reporting and will require additional collection of personal information that may lead to privacy concerns for online sellers. This bill would also provide relief for payments made during 2022 by extending the minimum threshold number of transactions back to 200 for one transitional year. It is unknown at this time if this bill will be passed or make an impact on the changes already made for the 2022 tax year.
If you would like to talk to one of our professionals in our Entrepreneurial Support & Client Accounting Segment on this topic or any other business related topic, please do not hesitate to contact us.
About the Author
Lindsay joined McKonly & Asbury in 2003 and is currently a Principal with the firm. She provides audit, tax, and consulting services, with an emphasis on family-owned business. Lindsay is a leader in the firm’s Outsourced Accounting… Read more