Author: Burton Kelly
The Internal Revenue Service (IRS) announced early last year that third-party settlement organizations (TPSOs), including payment apps, would now be required to report transactions exceeding $600.
These reports, however, only apply to business transactions and are not a new practice. TPSOs were previously required to send 1099-K forms to individuals who earned more than $20,000 from more than 200 transactions.
Payment apps, such as Venmo, PayPal, and CashApp, were supposed to begin sending IRS Form 1099-K to recipients in January 2023. However, just before Christmas, on December 23, the IRS announced that it would temporarily delay the implementation of the reporting threshold – this article discusses this delay in detail.
Why Did the IRS Lower the Reporting Threshold in the First Place?
The $600 tax report rule is part of the American Rescue Plan 2021. The rule was put in place to help close the gap between what Americans owed in taxes and what they actually paid.
According to the Joint Committee on Taxation, the new tax report threshold is expected to generate $8.4 billion in tax revenue between 2021 and 2031.
What Does This Delay Mean?
As a result of the delay, payment apps will now be required to send Form 1099-K to individuals who earned at least $600 in 2023 rather than 2022. However, the temporary delay does not exempt you from paying taxes for the fiscal year 2022.
The IRS still requires you to report all taxable income you receive, whether or not you received a Form 1099-K from your payment app for your 2022 earnings. Furthermore, because the IRS is delaying the implementation of the $600 reporting threshold, the previous $20,00 threshold will remain in place until December 2023, according to Erin Collins, National Taxpayer Advocate.
According to the IRS, the purpose of the temporary delay is to help taxpayers understand how the new 1099-K rule will affect their taxes and how to distinguish between business and personal payments.
How Will the New 1099-K Rule Affect Your Tax Reporting?
The first thing to remember is that the $600 rule is not a tax change; rather, it is a tax reporting change that allows the IRS to monitor transactions made through payment apps, which frequently go unreported. Once the delay is over, and the IRS fully implements this rule, you’ll receive a Form 1099-K from your payment app if you earn $600 or more in goods and services per year.
If you use your account for both business and personal purposes, the tax form you receive will include nontaxable and taxable transactions. Creating separate accounts for your business transactions is thus recommended to manage your finances and calculate your taxes more efficiently.
In addition, if you’re employed or self-employed, these payment apps may require you to provide tax information, such as an individual tax identification number (ITIN) or employer identification number. However, if you are a freelancer, you will only need to provide your ITIN or social security number.
Another good news is that the 1099-K may reduce the number of tax forms required by freelancers and self-employed individuals. Previously, freelancers and self-employed individuals who earned $600 or more would receive 1099-NEC forms for each client for whom they worked.
While you will continue to receive the standard 1099-NEC form when a client pays by direct deposit, cash, or check, your 1099-K form will now include payments from clients who pay using a payment app.
As a result, if you work for seven clients in 2023, six of whom pay via CashApp and the seventh via direct deposit, you will receive two forms rather than seven. That is one 1099-NEC form for direct deposit payments and one 1099-K form for payments made through your chosen payment app.
The Bottom Line
The IRS announced on December 23, 2022, that it would temporarily postpone the implementation of the new $600 tax report rule. Because of the delay, payment apps will not send you a Form 1099-K in January as planned, but you must still pay your taxes whether you receive a form or not.
