The IRS is now strictly enforcing a new law that requires taxpayers to report all of their gross payments received through a third party payment network, which constitutes an enormous change in the filing requirements for individuals who must record their income. As a result, citizens hoping to avoid taxation by not disclosing all of their gains will be held accountable.
A brand new regulation demands third-party payment platforms to issue a 1099-K form and the Internal Revenue Service if transactions exceed $600 in one year. Every business transaction is considered taxable income as per this rule – it must be related to goods or services. A 1099-K provides an income report for all credit card/third-party network transactions, which essentially comprise of payment transactions you have received from other sources.
Changes Regarding 1099-K
Explanation of 1099-K Reporting
Prior to the 2023 tax year, participating companies like PayPal, Cash App and so forth only needed to furnish a 1099-K if a self employed individual completed more than two hundred business transactions where they accrued a gross amount over $20,000. To illustrate this further – let’s say a Lyft driver earned $20,000 in reportable payment transactions after driving at least 200 rides.
Congress significantly lowered the reporting threshold for reporting on a tax return in 2021, reducing the total gross payment amount received from $20,000 over at least 200 transactions to just $600 over a single transaction. Again, the real point of emphasis is if you need to report business income for payments received not if you send money, if you send and received payments you could have to report the money you received on your tax return.
What Does This Mean For Me?
If your side hustle or self-employed business has generated more than $600 through digital payment apps, you must report payments to the IRS. Additionally, if you are selling items for a profit on platforms like Facebook Marketplace and Etsy, make sure to save all of your receipts as supporting documentation for tax purposes. If you use banking services provided through cash app you are almost certain to have a 1099-K with them.
Fortunately, money sent for personal transactions by friends and family through third-party payment apps won’t be taxed – only goods and services will have taxes applied. In other words, if your roommate, friend / family member, or co-worker bought you lunch as a courtesy and you paid them for it, then such transactions be classified as a personal transaction. On the other hand, if they paid for services such as hair-styling, childcare or pet sitting – then this exchange of money could be considered to be part of running their business.
Third-party network transactions refer to financial transactions that are processed by a payment processor or intermediary, such as PayPal or Square, rather than directly between the buyer and seller. These transactions are reported to the IRS on Form 1099-K, also known as the “Merchant Card and Third Party Network Payments” form. This form reports the total dollar amount of transactions processed through the third party network during the tax year.
Third-Party Settlement Organizations
Third-party settlement organizations, such as Stripe or Amazon, also affect 1099-K reporting and filing. These organizations often handle the financial transactions for multiple merchants, and are responsible for aggregating and reporting the transaction data for all of the merchants on a single 1099-K form
Tips For Accurately Reporting Transactions With Third-Party Payment Networks on 1099-K
Here are some quick tips to report transactions with third-party payment networks correctly on 1099-K:
- Keep detailed records of all transactions processed through third-party payment networks, including the date, amount, and name of the buyer or seller.
- Verify that the information on the 1099-K form is correct and contact the third-party settlement organization if there are any discrepancies.
- Consult with a tax advisor or accountant to ensure compliance with all applicable tax laws and regulations.
- Review the form and ensure that the information matches the records you have.
- If there is any discrepancy found contact the third-party payment networks immediately to correct the error.
*Note: It is crucial to double-check that the provided information is accurate. You want to make sure everything is compliant to avoid any issues with the IRS. Don’t risk there being issues if you can speak with a tax expert.
When Do I Receive My 1099-k?
Since 1099-K forms must be submitted by January 31st, it’s best to take the initiative and check third-party platform websites for your form. Don’t rely on conventional mail services as these documents are electronic – but instead search them out yourself! For instance if you go to your PayPal account on the PayPal app then there should be a section for tax documents for your tax return.