Changes in Tax Reporting for Business Transactions on Payment Apps and E-commerce Sites
As we approach the end of the year, there is a debate surrounding tax reporting for business transactions on payment apps like Venmo and PayPal, as well as on e-commerce platforms like eBay, Etsy, and Poshmark.
Some lawmakers are advocating for an increase in the IRS reporting threshold for Form 1099-K, which covers third-party business payments. If your transactions exceed this threshold, you will receive a Form 1099-K at tax time, detailing your income from side hustles, small businesses, or sales on e-commerce sites.
The American Rescue Plan Act of 2021 significantly reduced the threshold, but now lawmakers are considering reversing this change.
Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, mentioned the bipartisan interest in addressing this issue on HaberTusba’s “Squawk Box” last week, due to the misinformation surrounding it.
How the Tax Rule Change Affects Payment App Users
Prior to this year, you would receive Form 1099-K if you had more than 200 transactions totaling over $20,000. However, starting in 2023, the threshold is reduced to just $600, and even a single transaction can trigger the form.
This change is expected to result in a surge of Forms 1099-K in early 2024, when taxpayers typically receive “information returns” from employers and financial institutions. Duplicate copies of these forms are sent to the IRS.
The threshold does not apply to personal transfers on apps like Venmo and PayPal, such as sending money to friends or family. However, there is concern that some taxpayers may mistakenly receive a 1099-K, causing difficulties during tax season.
Even someone who makes a one-time sale, like selling an old couch or concert tickets, above $600 may find themselves dealing with an additional tax document.
The lower 1099-K reporting thresholds have been controversial, especially among online sellers, gig economy workers, and others who worry about confusion and higher taxes.
Bipartisan Support for the Change
The lower Form 1099-K thresholds were originally planned for 2022, but the IRS postponed the rule in December to provide clarity and assist taxpayers and professionals during the transition.
With the tax season approaching, there is now a legislative push from both the House and Senate to increase the reporting threshold for 2023.
The House Ways and Means Committee, led by Republicans, approved legislation in June to revert the reporting thresholds back to 2022 levels. Additionally, there are proposals in the Senate, such as the Red Tape Reduction Act introduced by Senators Sherrod Brown (D-Ohio) and Bill Cassidy (R-La.), which aims to raise the threshold to $10,000.
Advocates argue that the lower 1099-K threshold will reduce the burden on taxpayers, as these forms only help determine taxes that are already owed.
Concerns about Form 1099-K
Tax professionals have expressed concerns about the change to Form 1099-K. The American Institute of CPAs (AICPA) renewed its support in June for raising the reporting threshold to avoid confusion in the tax system.
In a letter endorsing the Senate’s Red Tape Reduction Act, AICPA highlighted concerns about the administrative burden for taxpayers and the IRS, especially if personal transactions like gifts or reimbursements are mistakenly included in Forms 1099-K.
Form 1099-K has always been problematic.
Phyllis Jo Kubey
Immediate past president of the New York State Society of Enrolled Agents
“Form 1099-K has always been problematic,” said Phyllis Jo Kubey, a New York-based enrolled agent and immediate past president of the New York State Society of Enrolled Agents. She explained that even with the older thresholds and number of transactions, Form 1099-K often failed to accurately reflect taxable income.
For businesses selling goods, Form 1099-K may not accurately reflect returns or adjustments. Kubey added, “If the IRS has a document that says ‘X,’ and you’re reporting ‘Y’ on your tax return, it may lead to further scrutiny, causing additional time, expense, and frustration.”
Preparing for the 1099-K Reporting Change
Even if you do not receive a Form 1099-K, it is important to remember that business payments are still taxable. Experts recommend getting organized and familiarizing yourself with the payment systems, regardless of the platform you use.
Albert Campo, a certified public accountant and president of AJC Accounting Services in New Jersey, advises obtaining payment information as soon as it becomes available. This can save time during the next filing season.
Changes in Tax Reporting for Business Transactions on Payment Apps and E-commerce Sites
As we approach the end of the year, there is a debate surrounding tax reporting for business transactions on payment apps like Venmo and PayPal, as well as on e-commerce platforms like eBay, Etsy, and Poshmark.
Some lawmakers are advocating for an increase in the IRS reporting threshold for Form 1099-K, which covers third-party business payments. If your transactions exceed this threshold, you will receive a Form 1099-K at tax time, detailing your income from side hustles, small businesses, or sales on e-commerce sites.
The American Rescue Plan Act of 2021 significantly reduced the threshold, but now lawmakers are considering reversing this change.
Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, mentioned the bipartisan interest in addressing this issue on HaberTusba’s “Squawk Box” last week, due to the misinformation surrounding it.
How the Tax Rule Change Affects Payment App Users
Prior to this year, you would receive Form 1099-K if you had more than 200 transactions totaling over $20,000. However, starting in 2023, the threshold is reduced to just $600, and even a single transaction can trigger the form.
This change is expected to result in a surge of Forms 1099-K in early 2024, when taxpayers typically receive “information returns” from employers and financial institutions. Duplicate copies of these forms are sent to the IRS.
The threshold does not apply to personal transfers on apps like Venmo and PayPal, such as sending money to friends or family. However, there is concern that some taxpayers may mistakenly receive a 1099-K, causing difficulties during tax season.
Even someone who makes a one-time sale, like selling an old couch or concert tickets, above $600 may find themselves dealing with an additional tax document.
The lower 1099-K reporting thresholds have been controversial, especially among online sellers, gig economy workers, and others who worry about confusion and higher taxes.
Bipartisan Support for the Change
The lower Form 1099-K thresholds were originally planned for 2022, but the IRS postponed the rule in December to provide clarity and assist taxpayers and professionals during the transition.
With the tax season approaching, there is now a legislative push from both the House and Senate to increase the reporting threshold for 2023.
The House Ways and Means Committee, led by Republicans, approved legislation in June to revert the reporting thresholds back to 2022 levels. Additionally, there are proposals in the Senate, such as the Red Tape Reduction Act introduced by Senators Sherrod Brown (D-Ohio) and Bill Cassidy (R-La.), which aims to raise the threshold to $10,000.
Advocates argue that the lower 1099-K threshold will reduce the burden on taxpayers, as these forms only help determine taxes that are already owed.
Concerns about Form 1099-K
Tax professionals have expressed concerns about the change to Form 1099-K. The American Institute of CPAs (AICPA) renewed its support in June for raising the reporting threshold to avoid confusion in the tax system.
In a letter endorsing the Senate’s Red Tape Reduction Act, AICPA highlighted concerns about the administrative burden for taxpayers and the IRS, especially if personal transactions like gifts or reimbursements are mistakenly included in Forms 1099-K.
Form 1099-K has always been problematic.
Phyllis Jo Kubey
Immediate past president of the New York State Society of Enrolled Agents
“Form 1099-K has always been problematic,” said Phyllis Jo Kubey, a New York-based enrolled agent and immediate past president of the New York State Society of Enrolled Agents. She explained that even with the older thresholds and number of transactions, Form 1099-K often failed to accurately reflect taxable income.
For businesses selling goods, Form 1099-K may not accurately reflect returns or adjustments. Kubey added, “If the IRS has a document that says ‘X,’ and you’re reporting ‘Y’ on your tax return, it may lead to further scrutiny, causing additional time, expense, and frustration.”
Preparing for the 1099-K Reporting Change
Even if you do not receive a Form 1099-K, it is important to remember that business payments are still taxable. Experts recommend getting organized and familiarizing yourself with the payment systems, regardless of the platform you use.
Albert Campo, a certified public accountant and president of AJC Accounting Services in New Jersey, advises obtaining payment information as soon as it becomes available. This can save time during the next filing season.