Clarifications and Complexities of the New 1099-K Reporting Requirements

If you’re self-employed, a freelancer, work on a contract foundation with no taxes withheld, or are a part of the gig financial system, you might be used to receiving Type 1099-NEC or a 1099-Okay (previously 1099-MISC), from enterprise purchasers or clients who paid you no less than $600 through the 12 months. Should you settle for credit score/debit playing cards or use third-party settlement organizations like PayPal, you might obtain a kind you’ve by no means seen earlier than starting in 2023 for 2022 tax return filings, – Type 1099-Okay, Fee Card and Third-Social gathering Community Transactions, and it could get a bit trickier, particularly when you’re not ready.

What Is Type 1099-Okay?

Type 1099-Okay, Fee Card and Third-Social gathering Community Transactions, is an info return that tracks funds together with these made with bank cards; money apps akin to Venmo or Sq. Money App; on-line cost companies like PayPal or Stripe; and freelancing platforms that handle funds akin to Uber or Upwork. It stories the gross quantity of reportable transactions for each the calendar 12 months and its corresponding months to the IRS and to the individuals who settle for the cost playing cards or funds made by third-party settlement organizations.

New Guidelines

Type 1099-Okay is shipped to payees who settle for bank cards or funds settled by means of third-party networks. The “de minimis”  also referred to as minimal quantities exception for reporting by third-party community transactions has been funds exceeding $20,000 and 200 transactions for the 12 months. This threshold has been dramatically decreased from $20,000 to $600 in 2022, with no minimal variety of transactions.

Why the Massive Change?

Fee settlement entities (service provider buying entities and third-party settlement organizations) should report cost card and third-party community transactions. This reporting requirement started in early 2012 for cost card and third-party community transactions. The COVID-19 pandemic created an inflow of gig financial system employees, becoming a member of the others earlier than them already misreporting or underreporting their revenue – both deliberately or unintentionally – since they weren’t receiving a Type 1099-Okay. Third social gathering info reporting has been proven to extend voluntary tax compliance and enhance collections and assessments inside IRS.

The Significance of Recordkeeping

It’s extra necessary than ever to pay attention to all of the deductions out there to you and methods to correctly declare them, as a result of the “gross quantity” on the 1099-Okay is the overall unadjusted greenback quantity of the cost transactions made to you. This quantity is to not be adjusted to account for any charges, refunds, or some other quantities earlier than it’s reported on the 1099-Okay and to the IRS. Because of this Type 1099-Okay exhibits the worth of the transactions processed for you up to now 12 months, in addition to any bills paid in your behalf by your purchasers, akin to processing charges deducted earlier than cost reaches you, that means that your 1099-Okay ought to embrace these bills, reporting an revenue increased than you acquired.

Should you let your clients obtain money again once they use their debit playing cards for purchases, your Type 1099-Okay will embrace the money again quantities as a part of the gross quantity of cost card transactions. You sometimes wouldn’t embrace money again quantities in your revenue tax return or declare it as a enterprise expense. It will be significant that you simply keep information of buyer money again exercise over the course of your tax 12 months. Should you enable your clients to obtain money again once they use their debit playing cards for purchases, the 1099-Okay you obtain will embrace these money again quantities as a part of the gross cost card transactions. Typically, you wouldn’t embrace cash-back quantities as a part of your gross receipts in your revenue tax return. It will be significant that you simply keep information of buyer money again exercise over the course of your tax 12 months.        

Should you shared your bank card terminal with one other particular person or enterprise, your Type 1099-Okay will embrace cost card transactions belonging to the particular person or enterprise that shared your terminal, along with your individual funds. When required, you’ll must file and furnish info returns for these you shared a card terminal with, together with the overall cost card transaction quantity and some other revenue belonging to them. The place required, you must file and furnish the suitable info return (e.g., Type 1099-Okay or 1099-MISC) for every particular person or enterprise with whom you shared a card terminal. The knowledge return ought to embrace the overall cost card transaction quantity along with some other revenue belonging to the opposite particular person or enterprise. It’s best to retain information of funds issued to every particular person or enterprise sharing your terminal, together with however not restricted to shared terminal written agreements and cancelled checks. 

That is additionally a wonderful instance of why you shouldn’t combine your private and enterprise funds collectively: the 1099Ks may have all your transactions on them. Whereas ought to solely report the enterprise bills in your tax return, the IRS gained’t know any in a different way, and the opportunity of questions – and audits – arises.

1099-Okay versus the 1099-MISC (Now the 1099-NEC for nonemployee compensation)

One other error to be careful for is duplicate transactions. The IRS has directed that any 1099-NEC or 1099-MISC funds which might be reported on a 1099-Okay needs to be reported on the latter kind solely. To keep away from double taxation, maintain detailed gross sales information and look ahead to duplicate funds. Companies should present a 1099-NEC for non-employee compensation of $600 or extra. Funds made with a bank card should be reported on Type 1099-Okay, not Type 1099-NEC, but when the transactions occurred by means of bank card or third-party processors, there’s a chance of them being reported incorrectly on each kinds.

Reporting 1099-Okay Data

After completely reviewing your bank card/cost card receipt information and service provider statements to substantiate that the quantity is correct, you’ll report gross receipts or gross sales and enterprise bills on the tax kind that you’d usually file. Should you’re a sole proprietor, you’ll document the data from Type 1099-Ks as revenue and deduct charges and different enterprise bills included within the complete on Schedule C. Quantities associated to rental exercise are reported on Schedule E, and farming on Schedule F. Bear in mind, the gross quantity of a reportable cost on Type 1099-Okay doesn’t embrace changes akin to credit, low cost quantities, charges, refunded quantities, or different quantities. Partnerships and firms report Type 1099K quantities as a part of their gross income on their applicable revenue tax return. 

If your corporation has a couple of supply of revenue, you would possibly must report Type 1099K quantities on a couple of line, return or schedule; for instance, you probably have each a retail enterprise and rental revenue and you utilize the identical bank card terminal for each ventures, your 1099-Okay will embrace gross bank card receipts for each. You’ll must rely by yourself correct recordkeeping to correctly report gross retail receipts on Schedule C, and rental exercise quantities on Schedule E.

Contacting the Filer or the Fee Settlement Entity Listed on Type 1099-Okay

You’ll need to contact the filer of the Type 1099-Okay utilizing the data within the higher left nook of the shape when you obtain a Type 1099-Okay that doesn’t belong to you, if it comprises errors or has a Service provider Class Code that doesn’t precisely describe your, or in different circumstances to determine why you acquired it or to request a corrected Type 1099-Okay. Should you don’t acknowledge the filer, you’ll be able to contact the Fee Settlement Entity utilizing the title and quantity within the decrease left nook of the shape to find out why you acquired it or request a corrected Type 1099-Okay. You should definitely maintain all correspondence and related documentation relating to errors. Per the IRS, when you can’t get your Type 1099-Okay corrected, you’ll be able to report your revenue appropriately and fix a proof to your tax return.

Should you use Types 1120, 1120S or 1065 to report your corporation revenue after which obtain a Type 1099-Okay along with your particular person title and social safety quantity, request a corrected Type 1099-Okay with your corporation’s tax identification quantity and request that they use the enterprise quantity sooner or later. Should you modified your corporation construction through the 12 months akin to changing from a sole proprietorship to a partnership and continued utilizing the identical card terminal, the quantity on the 1099-Okay could not correspond along with your new entity’s tax return, notify your service provider acquirer of any change to the title and tax identification quantity that hyperlinks the terminal to your present enterprise construction. 

One other case the place you must request a corrected Type 1099-Okay is when you purchased or bought your corporation through the 12 months and your Type 1099-Okay contains funds for transactions made earlier than or after the transaction as a result of the tax identification quantity and enterprise title related to a bank card terminal weren’t up to date.

Pastime or Enterprise?

On-line public sale websites akin to eBay are an instance of the significance of this. Whereas eBay sellers will obtain Type 1099-Ks, they could or could not should report and pay tax relying on how they’re promoting on the location. If it’s thought-about to be a passion by the IRS, the revenue should be reported, however bills can’t be taken. If they’re working their eBay account extra like a enterprise, they need to be reporting your gross sales to the IRS however are allowed to take deductions.

Even one thing like having a craft enterprise through the holidays can increase questions. Should you take bank cards doing a craft present, you’ll obtain a Type 1099-Okay; as well as, when you additionally settle for funds from a third-party settlement group, you’ll obtain a 1099-Okay from that additionally if the combination quantity of funds for items and companies exceeds $600 through the 12 months, whereas beforehand you’d solely have acquired one for the latter.

Whereas the brand new guidelines are crucial for IRS oversight because the “gig financial system” and freelancing continues to broaden, they’ll and can have an effect on folks even when they’re receiving them for a comparatively small aspect hustle and never as a main supply of revenue. Search the help of a tax skilled if you’re doubtful.

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Candace J. Dixon has been in follow as an accountant since 1996. She has a Bachelor’s Diploma in Accounting from Saint Leo College in Tampa, Florida, and is a Licensed Superior QuickBooks ProAdvisor. She focuses on taxation and superior accounting and is well-versed within the Inner Income Code and the gig financial system. Her specialties are tax consulting, tax planning, and researching advanced tax points. She is presently employed because the Senior Tax Accountant at CWSEAPA PLLC positioned in Orlando, Florida. www.craigwsmalleyea.com.