Many small businesses and self-employed individuals have adopted the use of Third-Party Network Transactions through services such as Venmo and PayPal to receive payment for goods or services that the business or self-employed individual provides.
For calendar years after 2021, there are new minimum reporting thresholds that determine what must be reported to the IRS.
For calendar years prior to 2022, small businesses and individuals that received gross payments in excess of $20,000 AND more than 200 such transactions were required to receive Form 1099-K.
For calendar years after 2021 (tax year 2022 onward), small businesses and individuals are now required to receive Form 1099-K for gross payments that exceed $600 annually AND any number of transactions. These changes are also applicable to individuals who utilize auction sites like eBay for the selling and reselling of goods. These minimum reporting thresholds apply only to payments settled through a third-party network. There is no threshold for payment card transactions.
However, not all payment networks issue Form 1099-K for transactions that are considered taxable. Zelle, for example, facilitates communication between financial institutions but does not handle the settlement of funds. Therefore, it is the responsibility of the individual to accurately record and report goods and services transactions of this nature to the IRS.
All business income should be reported on your tax return and is often referred to as gross receipts on income tax returns. Thus, transactions qualifying for Form 1099-K should be considered when calculating gross receipts for income tax purposes. Amounts generally excluded from gross income (selling personal goods for a loss), would not be subject to income tax. In addition, it is important to separately track the cash back amounts that customers may receive, since those amounts would be reported on Form 1099-K, but should not be reported as gross receipts for income tax purposes. There may be other situations where taxpayers will be required to retain more detailed information to support any differences between the amounts reported on Form 1099-K and their taxable gross receipts such as the sale of the business or change in entity structure during the tax year.
Since payment networks operate differently, it is important that you be aware of any transactions that may result in tax obligations. If you have any specific concerns about reporting your income from Third-Party Network Transactions, or whether your income is taxable, please reach out to our team.
You’ve heard our thoughts… We’d like to hear yours
The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].
Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.