In November, the IRS announced this it was pushing back the changes to Form 1099-K reporting rules again. Let’s examine.
What is Form 1099-K?
Form 1099-K is issued by third-party settlement organizations and third-party network transactions for business transactions.
A third-party settlement organization is sometimes called a merchant processor. Whatever you call them, they are the back-end processor of credit card transactions. So, if you own a business and you take payment via credit cards, you probably have a merchant processor/third-party settlement organization. That entity will send you a Form 1099-K at the end of the year, showing all of the money you took in via credit cards and debit cards during the year.
Then we have third-party network transactions. These are transactions through places such as Venmo and PayPal (and many others). The app holds the money in-between the transaction.
Example: you are in a fantasy football league and you pay your $50 league dues to the commissioner via the commissioner’s Venmo account. The $50 sits at Venmo until the commissioner logs into their account and gets the money. This is an example of a third-party network transaction.
NOTE: places such as bill.com and Zelle are not in the category of being a third-party network because they don’t hold the money in-between the transaction. This means YOU issue the 1099-NEC when paying through bill.com and Zelle.
Thresholds
Third-party settlement organizations (i.e. merchant processors) send a 1099-K when $600 or more is processed through the processor.
The real issue with 1099-K has always been the payment apps/third-party network transactions. Here’s why.
Historically (since this all started in 2012), third-party network organizations such as PayPal have had a reporting threshold of:
- $20,000 received AND
- 200 transactions processed
If the recipient topped BOTH of those thresholds, the organization would issue a 1099-K.
The law relating to 1099s also says, specific to contract labor, that the payer of contract labor does not need to issue a 1099-NEC if the 1099-K rules apply. The 1099-K rules apply if one or the other of these is true:
- Payment is made through the contractor’s business account on the app, OR
- The payer marks “good and services” when making the payment.
If one or the other of those things is true, then the payer doesn’t issue a 1099-NEC. And this exception applies even if the contractor’s transaction count is below the 1099-K thresholds.
This creates a hole in income reporting.
Example
This is not a hypothetical; things like this happen all the time.
Joe is a contractor who works for 25 different businesses, each of whom pay him $10,000 for the year. So, Joe makes $250,000 in contract labor.
If Joe’s customers pay him by check (or a bill-pay service such as bill.com or Zelle), the customer issues a 1099-NEC to Joe, and the Big Bad IRS knows all about Joe’s $250,000 of income.
But if Joe can get the customers to pay him via Venmo, this is what happens (assuming that they either pay through his business profile, or they mark goods and services when making the payment):
- Joe takes in $250,000 through Venmo – this crosses the $20,000 threshold for a 1099-K to be issued by Venmo, but there’s another threshold to look at;
- Joe only has 25 transactions, well below the 200 transaction threshold – this means Venmo won’t issue a 1099-K.
- Because the payers marked “goods and services” when making the payment, they don’t issue a 1099-NEC.
This means NONE of Joe’s income goes on a reporting form.
One of the major misconceptions in the tax world is that people think they don’t need to report their income if it’s not on a reporting form. This is not true. However, in the real world, there are many “Joe’s” for whom their eyes would light up and they would say “hey, I didn’t get a 1099, so I don’t need to report it.” Or, “I can report whatever I want, because I didn’t get a reporting form.”
And while this is not right and proper, it’s also hard for the IRS to enforce, because there’s no 1099 issued and thus no paper trail.
Enter the 1099-K Changes
The American Rescue Plan in March of 2021 called for a change – starting in 2022 – to 1099-K reporting for contract labor. ARP said a third party network processor (i.e. the PayPals and Venmos, etc. of the world) should issue a 1099-K if the total amount received through the platform for the year was $600 or more for goods or services.
From the beginning, there has been outrage about this, and so the IRS delayed the implementation of the rule two times now.
(The outrage has been misplaced if not flat-out wrong and misleading – such as tax pros talking about the “IRS is coming for your Venmo transactions!!!! OMG OMG OMG THE OUTRAGE!!!!!!” Well yes, I suppose the government is coming for your Venmo transactions … but only BUSINESS transactions that should have been reported in the first place. But I seem to be in the minority in thinking this.)
Changes Delayed
In December of 2022, the IRS announced that the changes to the reporting threshold for 2022 would NOT take effect – the “usual” threshold of 200 transactions and $20,000 processed would continue to apply for 2022.
And in November of 2023, the IRS announced that the changes were being delayed again, so for 2023 the “usual” threshold of 200 transactions and $20,000 processed would continue to apply for 2023.
The IRS now says a threshold of $5,000 will apply for 2024 1099-K reporting. This appears to be a “transition” year, so the $600 threshold “might” apply for 2025 (we don’t know that for sure, this is my speculation).