Note: IRS delays the rollout of the $600 threshold for 1099-K reporting.
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The threshold for Form 1099-K remains at $20,000 with a 200 transaction limit for the year 2023. This delay designates 2023 as a transition period, maintaining the existing requirements for reporting.
Here’s why payment apps like PayPal and Venmo are required to file a Form 1099-K starting in 2022.
Unlike the early 2000s, where tax reporting was somewhat unregulated, the early 2020s are springing up a lot of surprises for businesses in the tax compliance narrative.
First, with the 1099-NEC re-introduction, followed by 1099-NEC updates, 1099-MISC changes, and now Form 1099-K reporting changes. The IRS is stern in its approach, now more than ever, to streamline the voluntary tax compliance program, and as a result, its focus shifts to Form 1099-K reporting.
With the introduction of the American Rescue Plan Act (ARPA) of 2021, the IRS and the Biden Administration have come together to strengthen the regulatory reporting policy and improve the 1099 tax reporting practices.
This included making changes to Form 1099-K reporting.
The 1099-K reporting changes vastly impact payment settlement entities like PayPal, Venmo, Cash App, and others as they play a central role in enabling payment transactions between businesses and customers.
The gig economy, cryptocurrency market, merchant payments ecosystem, and a variety of emerging markets are also heavily impacted by the 1099-K 2022 reporting changes.
Form 1099-K reporting changes for 2022 clarify that only goods and service transactions constitute for 1099-K reporting and personal payments, and other eligible small business payments are excused.
1099-K reporting changes can be interpreted this way. The focus is not just on who is paying and who is receiving the payment in subject, but where it’s going, and if the transaction is transparent enough to disclose the purpose, nature, and all the parties involved.
Let’s learn a little more about Form 1099-K reporting, and why payment apps like Venmo and PayPal need to file a Form 1099-K in the following discussion.
What Is Form 1099-K?
Form 1099-K is an IRS information return that specifically reports third-party payment network and payment card transaction information.
Starting from the 2022 tax year, third-party payment networks like Venmo, PayPal, and others need to file a Form 1099-K to report payments in excess of $600 issued to the participating payees.
Only goods and service transactions qualify for 1099-K reporting. Personal payments, or payments outside the course of business, are not considered for 1099-K reporting.
What Changed For Form 1099-K Reporting In 2022?
Previously, Form 1099-K instructions required the payers to report the payment transactions only if the gross total of the payments exceeds $20,000 and the total number of transactions is 200 or higher.
However, this was changed for the calendar years after 2021.
Now, payers are required to file Form 1099-K if the gross total of the reportable payments exceeds $600 with no limitations or reservations on the number of transactions.
As you can see, this was a drastic cut in the reporting threshold, reducing the minimum reportable cap from $20,000 to $600.
Some were quick to criticize the 1099-K 2022 changes because the reduced threshold meant more reporting and more transparency of payment records.
The $20,000 limit gave room for malpractice, which was a strict no-no per the IRS.
As sudden and chaotic as the change might seem, it’s actually quite easy to practice when the approach is to comply and stay in the good books of the IRS.
Why Do Payment Apps Need To File A Form 1099-K 2022?
It’s essential to note that 60% of U.S. consumers prefer payment cards to cash. There has also been a 7% dip in cash payments since 2020, which gives us insights into the growth of third-party payment network usage.
PayPal is the most used mobile payments app in the U.S. in 2021. About 30% of the American consumers in the North American e-Commerce Transaction segment have used mobile payment apps like Venmo and PayPal to purchase products or pay for the services.
So, be it at a small outlet store down the street or an online business, payment apps occupy a fair share of the payments ecosystem in the U.S. consumer market.
As a result, the IRS wants:
- More transparency
- Payment apps to comply
- Recipients of the third-party payments to disclose their income accurately
So, it can be understood why the IRS wants payment apps and other qualified 1099-K payers to file and issue a 1099-K to their recipients.
What Payment Apps Are Saying About Form 1099-K New Changes
Payment apps like Venmo and PayPal have already updated their query pages in accordance with the 1099-K issuance policy. Other third-party payment networks and payment card companies have started to comply with the new rules.
However, some contend the new reporting changes put immense pressure on small businesses and self-employed professionals in the gig economy who want to keep their third-party earnings undisclosed due to financial constraints.
It’s safe to say that the change to 1099-K 2022 reporting is still a hot topic among merchant businesses and the mobile/digital payment ecosystem.
How Tax1099 Can Help
Tax1099 is an IRS-authorized regulatory reporting and tax compliance enabler, trusted by 200,000+ businesses across the U.S. Third-party payment networks, payment card companies, payment facilitators, payment processors, mobile wallet companies, and other 1099-K payers eFile 1099-K forms with Tax1099 securely.
With Tax1099, you can:
- Import tax-sensitized data easily using 12+ top integrations
- Validate recipient TINs with real-time TIN Matching
- eFile 1099 series and other form types securely with 256-bit, bank-grade security encryption
Additionally, Tax1099 provides API services for bulk filings and KYB/KYC-centric identity checks with source-first accuracy.
