If you’re a business owner, sole proprietor, or contractor with customers who pay online or with a card (debit or credit), there’s a new 2022 tax law pertaining to 1099Ks you need to be aware of. Read on for more information.
What you need to know about the 2022 1099-K tax rule
The new federal tax law expands the requirements for how payment processors or third-party settlement organizations (also known as TPSOs) must report accounts receivable each year. Chances are, if your business accepts payment by card or online (via PayPal, Venmo, or Zelle for example), you’re using a TPSO.
The old way
Previously, business owners and freelancers could expect to receive a 1099-K form only if their TPSO processed more than $20,000 in gross revenue or at least 200 transactions for their business.
The new way
Now, the IRS now requires that TPSOs send you (and them!) a form 1099-K if they processed $600 or more in revenue for your business during the fiscal year.
The timeline
The new rule about 1099-K forms from payment settlement entities applies to transactions made after December 31st, 2021. So although the law is already in effect, because it only applies to business transactions made from 2022 onward, there are no 1099-K changes to address for the 2021 tax year.
What hasn’t changed
You are still responsible for reporting, and paying taxes on, your revenue. This new law simply expands on previous reporting requirements from payment processors in order to give the IRS more comprehensive financial information so they can be sure that your business is accurately reporting your taxable revenue.
Is this new tax law actually a tax increase?
No, it’s not. Did we double-check? Yes. Are we sure? Yes. And is the answer still no? Yes, it is still no. Should you still check with your accountant? Yes, always, of course. Are you uncomfortable with the fact that we used a yes and a no to answer this question? We apologize; some of our editors have a terrible sense of humor. Cheap thrill. But really, the new law is a reporting change, not a tax increase.
Will I get a 1099-K instead of a 1099-NEC?
No. There are many types of 1099 forms, and for self-employed people, the most common is the 1099-NEC, which reports gross revenue from any client who paid you at least $600 using cash, check, ACH or (some other way that doesn’t include a TPSO) during a fiscal year.
Let’s say that in 2022, Client A paid you a total of $1,500: $800 by check and $700 using Venmo for Business.
You should get a 1099-NEC for $800 from Client A and a 1099-K reporting the $700 from Venmo.
I’ve received 1099-Ks previously when I had less than $20,000 or fewer than 200 transactions. Why?
It’s probably because you’re a resident of Maryland, Massachussettes, Mississippi, Vermont, Illinois, Arkansas, Missouri, or Virginia—all of which have historically had lower reporting thresholds for 1099-Ks. The law we’re covering in this article is federal; state laws vary. This is yet another reason to always check in with your accountant.
How does this new rule affect my bookkeeping??
Let’s be honest: more tax paperwork isn’t usually cause for celebration, but this expanded reporting requirement could actually be pretty helpful. If you’re a business owner who processes a large volume of payments each year, the new 1099-K law will help you to cross-check your records with those of your TPSOs to ensure that you didn’t miss anything and are reporting the correct numbers. Reporting accurate numbers means you’re less likely to make a mistake that could lead to an audit and/or fines.
Who might send me a 1099-K form, and when should I receive it?
You might receive a 1099-K return from any TPSOyou use to collect payments. If you’re going to receive a 1099-K, your TPSO should send it to you by January 31st of the year following the financial year in question. So realistically you’d receive 2022 1099-Ks no later than early February 2023.
What action is necessary from me, as a business owner or freelancer?
Your TPSO may contact you to obtain your tax identification number . If they do, once you verify that the request is legitimate, you should provide this information. Your TPSO needs this information to fill out your 1099-K.
You’ll also want to cross-reference your 1099-K with your own revenue records. If there are any discrepancies, follow up with your TPSO directly to address them.
Keep a copy of your 1099-K form(s) with your other tax records. According to the IRS, you don’t need to report this income separately, since the information it contains should already be documented in your tax returns. Still, check with an accountant for clarity on your tax responsibilities.
How did this new rule become law?
This revision of previous tax law came about as a result of the American Rescue Plan Act of 2021. This bill is commonly known as the COVID-19 stimulus bill of 2021. It became law on March 11, 2021. The bill exists largely to provide financial support for individuals and businesses impacted by COVID-19, but it also included this small change to the income reporting process for small businesses and payment settlement entities.
Will I get a 1099-K for TPSO transactions that are not business-related?
Nope. Even if a friend PayPals you reimbursements for $600+ worth of dinners (or whatever) over the course of a fiscal year—so long as those dinners were personal (not business), you shouldn’t see a 1099-K for those transactions. The IRS does not care if you have a friend who always forgets their wallet when you’re out on the town and uses a TPSO to pay you back a day late and a dollar short. But remember: keep your business and personal stuff separate.
