The IRS Announces a Delay in New Reporting Rule Threshold

The Internal Revenue Service (IRS) likes to know when you receive money for rendering services or selling products. They also like to tax that money. In an ongoing effort to help them identify those transactions that pay you money, the IRS proposed lowering the threshold for annual filing requirements for businesses that send money electronically to coincide with the levels of other reporting requirements, such as Form 1099-MISC.

The IRS has been using Form 1099-K, Payment Card and Third Party Network Transactions, to report monies paid during the year through third-party payment settlement organizations, such as PayPal or Venmo, to businesses and individuals. If you receive direct payments, you should receive the form from your payment processors or payment settlement entity. But for years, these networks have only been required to send Form 1099-K if the payments you received exceed $20,000 from more than 200 transactions. The form reports the gross amount of all reportable transactions for the year and by the month. The IRS also receives a copy, and they expect you to incorporate that information into your tax filing.

For instance, if you sold an antique painting and received payment for it through PayPal for $25,000, PayPal may send you a 1099-K reporting that total. You would then be expected to report the sale price as income, against which you would deduct your cost basis in the painting and transaction costs to arrive at a net profit figure, which would be taxable.

Under the American Rescue Plan Act, which was enacted in March 2021, the IRS proposed to lower the reporting threshold in which the provider is required to furnish the tax form. This change would reduce the limit from $20,000 (cumulative for the entire year) to only $600 for the sale of goods and services; the number of transactions is irrelevant. As a result, this would affect a much greater group of taxpayers than was previously the case.

The change originally was scheduled to take effect for the 2022 tax year, with the forms going out in January 2023. However, in December 2022, the IRS announced its first implementation delay and released guidance stating that 2022 would be a transition period for the change.

Now, the IRS has announced a second delay in the reduction and will keep the limit at $20,000 for 2023. The limit will be reduced to $5,000 for 2024 and then will continue to be lowered until it reaches $600. It is important to note that anyone who accepts payments from credit cards or third-party payment networks in excess of the limit should receive a 1099-K. This is not imposing a new taxing requirement. It is only requiring the networks to inform the IRS of the payments. You should have been reporting the income all along. Additionally, please be aware that simply because you received a 1099-K that does not necessarily mean that you will owe tax.  Sticking with the example above, if you had a cost basis equal to the sale price of the painting, there would be no tax due. In some cases, you may already have this income reported by another method. It is important that you have good accounting records to ensure you do not double-report the income.

This does not change the taxability of services/sales you render or monies you receive. It only informs the IRS that a transfer has occurred and requires you to report that transaction. For most of us, it is another way to ensure our records are complete. For some, it will require additional recordkeeping to guarantee they are reporting everything the IRS has.

Contributing Author: Joseph A. Hardick, CPA, CCIFP, is a tax partner who has over 40 years of experience in all areas of individual and corporate income tax preparation and planning. Joe specializes in corporate tax and tax planning for manufacturing and construction companies, and he has consulted on numerous areas of income and estate tax planning for high-net-worth individuals. For more information on this topic, contact Joe at 315-472-9127 or jhardick@dmcpas.com.