1099-K Delay Announced by IRS
Early last week the IRS announced another in the changes to 1099-K reporting requirements. The requirements have been plaguing tax preparers for the last two years after the thresholds for 1099-K reporting dropped from $20,000 to $600.
The 1099-K is required to be filed by payment processors like PayPal and Venmo. The thresholds of $20,000 or 200 in transactions were originally meant to capture those using the payment processors for business transactions. Lowering the threshold to $600 created an enormous possibility that simple transfers of money between friends and family were inevitably going to get caught in the mix. Up until last week, the IRS had offered minimal guidance as to how taxpayers and preparers alike could probably address receiving a 1099-K when none of the payments should be treated as taxable.
The best guidance the IRS had offered was taxpayers should report the 1099-K as “other income” with a matching adjustment to offset the amount noting that it was personal funds being transferred, or reimbursed personal expenses as opposed to business owners who would most likely be otherwise reporting the forms as part of their Schedule C. But the guidance seemed to be brushing off the issue that a lot of taxpayers were going to be confused with many not even being aware that they needed to report the form at all.
Thankfully, after pleading from the tax preparer community, the IRS announced further delays and a phase-in for the new thresholds. No threshold changes will be made for the 2023 reporting period according to IRS Notice 2023-74. Starting in 2024 the phase-in threshold will be dropped to $5,000.
It was predicted that the change in threshold to $600 would have resulted in over 30 million new 1099-K reports being filed with the IRS with a significant number of those going to taxpayers who either were not prepared to receive one and/or had no tax obligations on the amounts. Further, the IRS had made zero changes to Form 1040 to prepare for the reporting changes and to make it easier for taxpayers and preparers to address, especially when the amounts weren’t taxable.
It's unlikely that the threshold changes will be delayed beyond 2023. With a whole new year ahead for the IRS to address the issues, the phased-in changes are much more likely to begin with the 2024 calendar year. That means preparers should start having conversations with clients this year, especially those running small side businesses and gig economy workers who may otherwise not be used to reporting the forms. For clients receiving personal payments via these sources, it’s wise to recommend that they start keeping documentation of what their transfers are for to support their non-taxability.
Hopefully, further delay will afford the tax preparer community more guidance as these changes continue to move forward into the new year.
Christine Gervais
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and providing strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.