Form 1099-K is an information return used to report certain electronic payment transactions. Third-party payment processors like PayPal, Venmo, Stripe and Cash App report the gross amount of payment transactions processed, as well as the number of transactions processed, to the IRS and corresponding businesses. This is to help ensure tax compliance and improve information reporting.
Previously third-party payment processors were required to file Form 1099-K if businesses met the following thresholds:
- They processed at least 200 transactions during the year, and
- The gross amount of payments they processed for participating payees was at least $20,000.
In March 2021, Congress modified the requirements for filing Form 1099-K, lowering the thresholds required for filing Form 1099-K for businesses to:
- Those that processed at least 10 transactions during the year, and
- The gross amount of payments they processed for participating payees was at least $600.
Originally, this change was to be effective January 1, 2022. However, on January 3, 2023 the IRS announced a delay (see also Notice 2023-10), creating a transition period of one year. The new lower thresholds will not take effect until January 1, 2023, and the previous thresholds will continue to be in effect during the transition period.
When the new lower thresholds are implemented, a far greater number of taxpayers will receive Forms 1099-K who did not receive them previously. This could result in an increased number of notices from the IRS, questioning whether the gross receipts reported by a taxpayer match the gross receipts shown on the Forms 1099-K. Potential issues could arise if a taxpayer has multiple business or rental activities or uses third-party payment processors for personal transactions in addition to business transactions.
In preparation for these changes, taxpayers should review how they use electronic payment platforms and identify if there is a mix of business and personal transactions. When possible, taxpayers should structure their usage of third-party payment processors to make it easier to distinguish the transactions between different business entities and personal transactions. For example, a taxpayer should use a different third-party payment processor for electronic transactions related to their business, rental property, or personal transactions, if possible. In situations where it is not possible to separate the transactions with third-party payment processors, detailed records should be kept. These records will enable taxpayers to reconcile gross receipts reported on the Forms 1099-K to the gross receipts for each separate business activity with personal transactions clearly identified.