The recent changes in the 1099-K are especially important for small businesses and freelancers since they receive their payments through third-party payment platforms like Stripe and PayPal. In 2023, it is essential to make sure that your 1099-K is filled out correctly, as there are changes that will directly impact how you track and report the income received through third-party networks.
The changes were made to the 1099-K Form by the Internal Revenue Service (IRS) with the intent to ensure the accurate reporting of this income. Accurately reporting income—in the appropriate place—is necessary for compliance with IRS regulations. There are costly penalties for individuals and businesses who do not comply with these regulations. If any payments are made incorrectly and classified under business goods or services, that will trigger a Form 1099-K.
1099-K applies regardless if you are self-employed or own a business, whether freelancing or selling goods on an e-commerce platform. This form includes the gross of any transactions, and you will receive an individual Form 1099-K for each of these reportable payment transactions.
What is a reportable payment transaction? This is any payment made through a card transaction or third-party network transaction and includes payment apps as well.
With the dawn of the new year and new beginnings, it is not unusual for people to start a side business, a tendency that has increased since the lockdown. As more and more people started side businesses, it has come to the attention of the IRS that many of the small-income earners were either miscalculating or omitting their self-employment earnings altogether.
The IRS’ move to lower the threshold is to ensure that they can identify any miscalculations on the tax returns by independent employees; it also ensures a solid system is in place for proper bookkeeping and reporting.
What is a 1099-K Form?
1099-K is a form that is not used to file taxes; on the contrary, it is used to provide information to complete your tax returns. It can also be used to verify information that has been reported for you to file; it is also known as an informational return.
The 1099-K Form is officially called “Form 1099-K: Payment Card and Third-Party Network Transactions” it was named this way because it uses third-party information reports to increase tax compliance and improve tax assessment by the IRS. The 1099-K form is used to calculate how much income your business has received.
There has been a boom in the number of independent contractors, consequently, this increase has resulted in similar growth within the 1099 economy. The term 1099 economy is derived from the US Internal Revenue Service Form 1099-MISC, a form that organizations need to complete when paying independent contractors.
Form 1099-K reporting applies to anyone who accepts any payments from credit cards or third-party payment networks like PayPal. It is used to help you calculate how much business income you receive.
What are the changes to the 1099-K reporting requirements in 2023?
The reporting requirements for the 1099-K Form were delayed as a response to the concern exhibited by the general public. Recognizing the confusion taxpayers faced regarding how to report their payments on this form in their income tax returns, the IRS decided to lower the threshold for Form 1099-K by a year. This is good news for businesses since the $20,000 and the 200 business transaction thresholds remain in place till December 31, 2023.
Some helpful tips to help navigate through these changes
To help you navigate through Form 1099-K, we have listed a few points that might prove helpful to make your tax filing experience a bit easier.
1. Understand the requirements: Verify with your payment card receipt record and the third-party merchant statements to confirm if the amount mentioned on Form 1099-K matches correctly.
2. Review and organize: Ensure that you review your records to ensure the gross receipts are accurate and reported correctly on your income tax returns.
3. Familiarize and implement: Get familiar with the new reporting requirements and ensure you understand which transactions are subject to be reported and the threshold limits.
4. Review tax compliance systems: Ensure you review the current tax compliance systems you have in place to guarantee they can report essential information for 1099-K submission.
5. Consider using a third-party service provider: If your business lacks the resources or proficiency to handle the 1099-K reporting requirements, you can use a third-party service provider to do your business’s reporting.
6. Adhere to the timeline: Be sure to file the 1099-K Form within the stipulated deadline to avoid penalties.
Final thoughts
In this blog, we went through what a 1099-K Form is and read about the changes that will be implemented in 2023. It is easy to overlook steps in the payment process, especially when it comes to digital payments.
The 1099-K threshold changes mean sellers might receive an additional tax form this year, so it’s something to keep in mind. Reviewing your records carefully throughout the year will minimize any cause for concern. This form is an important aspect to keep in mind when conducting business through digital platforms and social media.
With the rise of virtual stores and the use of credit cards and payment processors like Stripe or PayPal, it is important to remember that these forms of payments are reportable as 1099-K income. You can learn more about third-party payment processors for field service businesses here.
Disclaimer
This post is intended to provide general guidelines only and should not serve as the basis for any legal or financial decision-making without consultation with professional advisors. Before you make any financial decision, you are advised to consult with your own tax or business advisor on matters referenced in this post.
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