The environment of digital transactions has changed dramatically over the last several decades, requiring the Internal Revenue Service (IRS) to implement and modify tax reporting procedures to keep up with the changing nature of online payments and e-commerce. One such adaption is the Form 1099-K, "Payment Card and Third Party Network Transactions," which is used to record payments made via payment cards and third-party networks. This page discusses the history of Form 1099-K, the current reporting level for 2024, the ramifications for receivers, and how it affects tax reporting.
Form 1099-K was adopted as part of the Housing and Economic Recovery Act of 2008, and its reporting obligations went into force in 2011. The form was created in response to the burgeoning e-commerce industry and the IRS's need to verify that revenue from online transactions was properly recorded. Initially, the form was intended to provide the IRS with a means for tracking payments made by third-party networks and payment card providers, therefore lowering the tax gap caused by underreported income.
The initial reporting requirement was established at transactions totaling $20,000 or more, with more than 200 transactions occurring in a calendar year. This level was designed to capture considerable e-commerce activity while exempting smaller, casual vendors from reporting requirements.
The reporting requirement for Form 1099-K stayed stable for many years until Congress drastically reduced it in the American Rescue Plan Act of 2021. Beginning with transactions in 2022, the barrier for total payments was dropped to $600, with no minimum transaction number restriction. This modification represented a substantial shift in reporting standards and was intended to capture a larger variety of transactions while also ensuring that revenue from even small-scale online sales and services was reported to the IRS.
However, in response to the issues and concerns created by the significant fall in the reporting threshold, the IRS established transitory relief options. For example, the IRS designated 2022 and 2023 as transition years to enable taxpayers and third-party settlement organizations (TPSOs) to adapt to the new standards.
Beginning in 2024, the IRS intends to phase in the $600 reporting barrier. According to IRS Notice 2023-74, dated November 22, 2023, the threshold for the 2024 tax year (i.e., the 1099-K forms taxpayers would get in 2025) is $5,000. This interim level is part of a phased implementation approach intended to smooth the transition to the $600 threshold. It demonstrates the IRS's response to taxpayer and industry comments on the issues associated with the lower threshold. The IRS has stated that the threshold would be $2,500 in 2025, and $600 in future years.
Receiving a Form 1099-K indicates that you received payments from payment cards or third-party networks that exceeded the IRS's reporting threshold. This form is essential for people and enterprises involved in e-commerce, online services, or other digital activities in order to submit taxes accurately. It reflects the gross amount of transactions without accounting for returns, refunds, or fees, thus receivers must carefully consider these issues when reporting their income.
As a consequence of the reduced reporting level, the number of taxpayers receiving Form 1099-K will skyrocket, including small merchants and those who make occasional online transactions. Even people who receive money from relatives and friends via a third-party network for reasons unrelated to selling items or delivering services may obtain a Form 1099-K. This modification emphasizes the significance of keeping comprehensive records of all internet transactions, associated charges, and any other company expenditures that may be deducted.
The introduction and subsequent revisions to Form 1099-K reporting levels have far-reaching ramifications for tax reporting. Taxpayers who receive this document must declare the income on their tax returns, taking into account the gross transactions recorded and subtracting any applicable business expenditures to determine their net taxable income.
For many, receiving Form 1099-K involves a more thorough approach to record-keeping and tax preparation. It may also result in enhanced scrutiny by the IRS, which will utilize the information to find anomalies between reported income and Form 1099-K amounts.
Things online may experience uncertainty when getting a Form 1099-K. It is critical to note that not all payments reported on Form 1099-K constitute taxable income. For example, if you sell a personal item for less than you purchased for it, you are not generating a profit, hence the sale profits are not taxable income. However, receiving Form 1099-K for such transactions requires correct filing on your tax return to prevent any IRS difficulties.
should report all company income, including Form 1099-K, on Schedule C of their individual income tax (1040) filing. Here's how to be sure you're reporting your 1099-K revenue accurately:
Begin by reporting your company's total gross revenue for the tax year on Schedule C. This covers all revenue from sales, services, and other commercial operations, regardless of whether it was paid in cash, by check, credit card, or via third-party networks.
If you received a Form 1099-K, the indicated amount should already be included in your gross revenues. Check that you are not double-counting this money. The amount on your Schedule C should include all of your company's gross revenue, including transactions reported on Form 1099-K.
A third-party network or payment card may send you a Form 1099-K to record money received as a gift or reimbursement for shared expenses. For example, suppose you pay your home's rent or household bills and your roommate reimburses you for their portion. These repayments should not be disclosed on Form 1099-K, but they may be. Personal payments contained in the 1099-K must be disclosed on your return and then "backed-out" so that you do not pay tax on the money received while still meeting the IRS' reporting requirements.
Because each payment app or online marketplace has its own methods for determining the nature of payments, you should read the rules of any applications or online marketplaces you use. The individual providing you the money may be able to categorize the transaction as a personal one, preventing 1099-Ks from being incorrectly generated in future years.
may result in a Form 1099-K. Depending on the circumstances, some of the funds generated via crowdfunding may be taxable to you and must be reported on your income tax return. However, certain funds collected may be deemed gifts and so not taxed. Aside from presents, consider these scenarios:
No Business Ownership Interest Given
When a fundraiser provides nominal items (such as business goods, coffee mugs, or T-shirts) in return for donations, the money generated is considered taxable income for the fundraiser. This is because the cash are received in return for products or services and are treated as income by the company.
Crowdfunding Income Is Not Taxable
When a fundraiser offers donors with a portion of the firm, such as stock or a partnership stake, the money generated is considered a capital contribution and is not taxable to the fundraiser. The amount provided determines the contributor's tax basis in the investment.
Special Considerations
Money obtained via crowdfunding that is organized as a loan that must be returned, or as gifts provided without any expectation of return, may not be deemed taxable income. The categorization is based on the individual facts and circumstances of each instance.
If you suspect your Form 1099-K contains erroneous information, contact the issuer immediately to obtain an amended form. Don't call the IRS since the Service cannot correct the form. Keep copies of all correspondence in case inconsistencies develop throughout the tax filing process.
If you got a 1099-K and have concerns or need help preparing your return, please contact our office.