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June 18, 2022

Businesses Must Prepare for the 1099-K Filing Threshold Decrease in 2022

When issuing reporting forms for 2022, businesses may be submitting additional worker information due to recent reporting range changes. At the start of this year, the income threshold for filing Form 1099-K (Payment Card and Third-Party Network Transactions) was significantly decreased, increasing the likelihood that larger numbers of businesses and workers may receive this document, including those who conduct personal transactions.

The history behind the change

The IRS requires banks and online payment networks like PSEs (payment settlement entities) and TPSOs (third-party settlement organizations) to report payments related to business or trade. Form 1099-K acts as the vehicle for this reporting requirement and typically affects companies like Paypal, CashApp, and Venmo, along with gig economy businesses like DoorDash and Uber.

In 2021, The American Rescue Plan Act reduced this reporting requirement minimum from $20,000 of reportable payments made over 200 transactions or more to just $600. While this amount is akin to other 1099 forms, this will be the first time gig economy workers receive these forms and will give the IRS a more accurate view of the revenue within these market spaces.  

Despite the change already being signed into law, some congressional members have attempted to pass bills that would restore the previous minimum threshold of $20,000 and 200 transactions. However, there are no guarantees of passage.

According to Congress and the IRS, underreporting these earnings has been an issue for some time. Part of the problem could be that taxpayers aren't aware that these additional sources of income from working as a Lyft driver or Etsy seller are taxable in the first place.   

While many taxpayers will likely be unaware of these changes until they receive their Forms 1099-K in early January of 2023, businesses should prepare now to minimize their tax liabilities regarding reportable payments. 

Next steps you can take now

Any reportable activities, including gig work, should be reviewed by taxpayers. Ensure any payments received are accurately documented. Any payments resulting from business or trade must be accurately reported to ensure employees can adequately withhold and pay any owed taxes. 

If you earn income through activities related to the gig economy or receive payments through a company like Paypal, consider increasing your tax withholding. You might also consider making additional or estimated tax payments to avoid potential tax penalties.  

Keep personal payments separate and record deductions

It is essential that taxpayers who receive taxable gross receipts through a PSE record their income and personal expenses separately. For example, suppose you send someone an electronic gift card using money from a PayPal account that also receives payments from your Etsy business. PSEs can't tell the difference between personal transactions and those related to your business, so it's best to maintain different accounts for each of these purposes.  

Remember, taxpayers who haven't previously reported all of their gig work income likely didn't track their deductions either. Now is the time to begin this process so one can minimize the amount of taxable income the IRS recognizes because of the gross receipts amount reported on Form 1099-K. It's not uncommon for the agency to treat all reported gross receipts as income and require substantiation of all deductions a taxpayer claims. The deductions you can take will vary depending on the type of work you perform.

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