Understanding IRS Form 1099-K: What You Need to Know
If you’re a seller of goods and services who receives payments through third-party settlement organizations (TPSOs) like PayPal, the IRS has made changes that may affect whether you receive a 1099-K form (Booklet|Form). Here’s a breakdown of what you should know about IRS Form 1099-K.
What is Form 1099-K? IRS Form 1099-K, officially titled “Payment Card and Third Party Network Transactions,” serves to report payments for sales of goods and services where payment is made either with a payment card or through a TPSO. The form is sent by the payment card company or TPSO to the recipient, the IRS, and the recipient’s state tax department. The deadlines for filing are January 31 for payees and either February 28 or March 31 for the IRS copy, depending on whether it’s filed electronically.
Payments by Payment Card Payment cards include credit, debit, and gift cards. If you sell goods or services and your customers pay you directly using these cards, you’ll receive a Form 1099-K from the payment card company or payment settlement entity, regardless of the number or amount of transactions. This rule remains unchanged.
Payments through TPSOs TPSOs act as intermediaries between buyers and sellers and include platforms like PayPal, Cash App, and others. Previously, TPSOs were required to report payments only if the recipient had gross annual earnings over $20,000 and more than 200 transactions in a calendar year. However, this left a reporting gap for businesses paid through TPSOs for amounts below these thresholds.
New Law
The New Law In response, Congress amended the law in the American Rescue Plan Act of 2021. Starting in the 2024 tax year, TPSOs will be required to file Form 1099-K for any payee paid more than $5,000 during the year, with no minimum transaction requirement.
IRS Implementation The IRS has delayed the implementation of these new rules multiple times due to concerns about managing the influx of new 1099-K forms and potential confusion among taxpayers. They’ve also cited the complexity of differentiating personal payments from those for goods and services.
State Variations Seven states and the District of Columbia have set their own, lower thresholds for 1099-K reporting, diverging from federal guidelines.
Conclusion
Form 1099-K reporting rules are evolving, with changes aimed at closing reporting gaps and ensuring accurate tax reporting. As thresholds shift and states implement their own rules, sellers should stay informed to comply with reporting requirements and avoid potential penalties.
Disclaimer: This is not legal advice, consult an attorney for legal advice or contact us.
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