Tax season can be difficult for small business owners and knowing what income you need to report and what paperwork you need to fill out is oftentimes overwhelming.

One of the newest ‘tax’ forms that the IRS introduced in the last 10 years is the 1099-K form. Laws and regulations regarding this particular form have been rapidly changing since January 2021, including a recent change that occurred in December 2022 that has been delayed AGAIN.

We’re here to help you sift through the legal mumbo jumbo related to 1099 forms! 

What is a 1099-K form? 

The IRS created a new form—the 1099-K—in 2011 to better record digital purchases that businesses were not reporting. The requirements are different from 1099-NECs as traditionally you could earn more money under a 1099-K before reporting it. It used to be that if you earned $20,000 dollars or more via the third-party online platform AND showed more than 200 purchases, the platform would issue you a 1099-K which is how your business would report income to the IRS. This was honestly a crazy, de minimis rule that also was “conjunctive” in legal terms, meaning you had to have both in order to receive a 1099-K form… so many businesses who didn’t meet that threshold and didn’t receive anything from the payment platform simply weren’t reporting income at all! To be clear, 1099K forms are created and sent out by Paypal/Square/Stripe/Venmo/Etsy/Ebay/Amazon so business owners are not responsible for creating them themselves.

How has 1099K reporting changed?

During COIVD-19 when demand for most goods was high and everyone was ordering everything online, the government noticed that people were still not reporting income correctly. Fast forward, President Biden signed the American Rescue Plan Act of 2021 (ARPA) into law on March 11th, 2021, which lowered the threshold for 1099-Ks to be issued from $20,000 to $600. Yup, $600 flat (which was more aligned with traditional 1099 forms). Thus, if the gross payment volume from sales of goods or services in a single calendar year is $600 or more, then the Payment Settlement Entity (PSE) is required to send you a Form 1099-K. These “PSEs” under this law include any third-party payment processor such as Venmo, PayPal, Stripe, Square, etc.

Although this law was supposed to be implemented by the end of 2022, the IRS announced on December 23, 2022 and again on November 21, 2023 that due ongoing concerns and confusion regarding this lowered threshold including pushback from large third-party payment companies, and IRS agents who would have a lot more paperwork to process in this next tax season, the IRS is delaying the implementation of this regulation. The IRS made it very clear that this was only a delay to clear confusion regarding this new regulation but that this change will still be implemented in the future. However, WHEN they implement this regulation officially is still a mystery since no actual date has been decided (but they have let taxpayers know that decisions regarding this delay will be made soon).  Although it was rumored that this would go into effect this next tax year… this requirement has been delayed again! 

So the bottom line is that you likely won’t have to worry about this new regulation until potentially 2025 tax season or even 2026 tax season because the IRS is planning to roll out a threshold of $5,000 for tax season 2025 (which encompasses your business income and expenses from 2024) as part of a phase-in to implement the $600 reporting threshold enacted under the American Rescue Plan (ARP). 

However, its important to note some states implemented their own rules regarding third-party reporting. Here is a good resource for you to check regarding your own state’s regulations regarding this. Be sure to also check with your CPA on whether your state has its own rules regarding third-party payment companies because, as tax professionals, they will have the most updated information related to your specific state. If you need more information on 1099-K forms, here is the IRS official link!

How does this delay affect business owners? 

The great news is… this 1099K regulation really shouldn’t affect your taxes much at all. You should be reporting all revenue you make to the IRS anyway. Unless your total earnings are under $600 for the entire tax year you are required to report your income to the IRS! Otherwise, you are committing fraud and it could cause some major issues for you if you are ever audited.  

Remember, you also need to continue issuing 1099-NECs to your contractors regarding work they have completed for you over the last year. Form 1099-K’s only purpose is for credit card companies and third-party processors to report the payment transactions they process for retailers or other third parties. 1099Ks do not affect your requirement to report payments made directly to independent contractors through 1099-NEC. For more information regarding 1099-NECs check out this blog! 

Your CPA should be guiding you through these changes in regulations and income reporting. Finding a good CPA is essential to helping your business grow and staying in compliance with tax laws. If you need a little extra help with your upcoming tax year make sure you talk to a CPA or bookkeeper. Get access to TLP’s recommended bookkeeper list HERE!

THIS BLOG POST IS NOT A SUBSTITUTE FOR LEGAL ADVICE. EVERY SITUATION IS DIFFERENT & IS FACT-SPECIFIC. A proper legal analysis is necessary based on your location and contract. Consult an attorney in your home state for advice regarding your contract or specific legal situation.

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