The IRS recently changed the reporting requirements for business payments received through online payment services like PayPal and Venmo. In order to ensure all income from these apps is accounted for, the IRS substantially lowered the threshold for required reporting. Now, if a business earns over $600 via an online payment processor in a calendar year, the payment processor must report on the income.
Who Gets a 1099-K?
Most retailers who accept online credit card payments from customers will henceforth receive a 1099-K if their annual processing activity meets the following guidelines:
- In limited instances, if the sales volume exceeds $600 per year.
- Through third-party processors, if the sales volume exceeds $20,000 and if there were over 200 individual transactions.
This is going to be a significant change for many self-employed gig workers and individuals with side hustles. However, it will not impact anyone using such payment platforms for personal transactions. The regulatory change is a government initiative to close the tax gap by making more online transactions reportable to the tax agency. The ultimate goal is to make it harder for individuals and businesses to underreport taxable income.
The changes to the tax code affect “third-party settlement organizations”—such as PayPal, Venmo, and Cash App—that accept payments for the sale of goods and services. According to the IRS, third-party information reporting has significantly increased voluntary tax compliance and enhanced collections and assessments.
What Is the Reporting Threshold?
In the past, there was a very high threshold for reporting peer-to-peer (P2P) payments for transactions involving the sale of goods and services. Companies were only required to submit Form 1099-K to the IRS for gross payments exceeding $20,000 and over 200 transactions within a calendar year.
The new regulation has significantly reduced this reporting threshold. If your business receives $600 or more in payments, the payment processors must submit a 1099-K, regardless of the total number of transactions completed within the calendar year. This includes any side income you received for selling t-shirts on Etsy or renting a house on Airbnb, for example. Even if you haven’t received form 1099-K, you’re still required to report all your taxable income from these payment platforms. However, you need to be careful to avoid double taxation via reporting on both forms 1099-MISC and1099-K.
How to Correctly Report Your 1099-K Tax Return
Beginning with the 2012 tax year, self-employed individuals must report 1099-K payments on Schedule C under a separate revenue line. So, you’ll need to reconcile your total business income and 1099-K payments with your profit & loss statements from your accounting system.
If you’re filing a Schedule F for farming operations, you need to report 1099-K payments there instead of Schedule C. And if you are not sure about how many 1099-K forms you will be receiving, you can defer your tax returns until after January 31, when you’ll have received all of these forms.
Always keep in mind that underreporting your taxes could negatively affect your financial future. So, seek professional help whenever you’re in doubt about your 1099-K reporting.