Tax time may come with a new form you weren’t expecting: 1099-K. The rules around this tax document have changed and millions more Americans will receive a 1099-K for the first time. Keep reading for more on the background and how this form may or may not affect your family’s taxes this year.
What is IRS Form 1099-K?
Form 1099-K is a tax form issued by a payment network or company. This is any company that accepts payments/transfers and is what the IRS considers a “payment settlement entity” Some common ones include Paypal, Venmo, Cash App, Stripe, Etsy, and others.
Why Did I Receive a 1099-K from Paypal, Venmo, Square, Cash App, etc.?
If you received more than $600 for a transaction the payment company does not consider “personal” during the year from a service or app, then you will probably receive a 1099-K. The $600 threshold is for the entire year. This is specific to a party who receives funds, not the sender. You could have a single transaction above the threshold that could trigger the tax form or many small transactions. In either case, you can expect a tax form.
Good or Services vs. Personal is an Important Distinction
The rules for what does or does not go on a 1099-k depend on the way the payment company classifies a transaction or transactions. It’s important to understand that different apps approach this question differently. If the company records a transaction as payment for “good or services” then the IRS says it has to go on a 1099-k. If the company records a transaction as something personal or not for goods of services then they will likely not.
Some apps will the party sending a payment if the money is for goods or services. If the sender checks that box, then that’s how the transaction is recorded. Other apps ask you to identify yourself as an individual or a business when you create your account. They can use this as the dividing line for who does or does not get a 1099-K.
What Changed for 2022 [and Beyond] on the 1099-K?
When congress passed the American Rescue Plan Act of 2021, lots of things made headlines from the 243 page bill. What did not make headlines was a single paragraph that made a massive change for Americans that receive electronic payments. Previously, the 1099-K form was sent if you had 200 transactions and more than $20,000 in total for the year. That tiny paragraph changed the threshold to $600 for 2022 and going forward.
Is This a New Tax?
Yes and no. For what it’s worth, the promoters of the bill say this is to “catch” Americans who were previously not reporting some forms of income. If you look at the letter of the tax law, there are cases this new reporting will bring to the attention of the IRS that were taxable and were probably not reported in the past. Intentions aside, this will result in taxes paid in some cases that would have otherwise avoided it. You can decide how you feel about that.
"What is the difference between a taxidermist and a tax collector? The taxidermist takes only your skin." -Mark Twain
I’m Not a Business Owner, So Why Did I Receive a 1099-K?
The IRS does not make a distinction here. You may get a 1099-K for a small business, but you could also get one for activity you consider to be personal in nature but the company sending the form considers to be for “good or services”. Individuals and businesses alike can receive a 1099-K. The reporting requirements for payment companies are very broad. For example, if you sold a couch on Venmo for $700 then you’re probably going to get a tax form.
I Got Multiple 1099-K Forms, Can That Happen?
Yes, it's possible to receive multiple 1099-K forms. You should, generally, receive one from each provider that meets the criteria discussed above.
Do I Owe Taxes on the 1099-K Amounts?
Maybe. The burden of proof is on you to prove to the IRS that what appears on your 1099-K is not taxable. That said, just because something is reportable to the IRS does not mean it is taxable. For example, the birthday money you sent to your nephews might appear on a tax form but is not a taxable transaction.
Keep in mind, some things you may not be aware of as activity that is taxed, might still be. The federal tax code is incredibly complicated so many taxpayers are surprised at the extent of what can be taxed in many cases. You may have to prove or explain to the IRS, when you file your taxes, the specific nature of transactions.
Do I Have to Report the 1099-K to the IRS?
Payment companies are required to send a copy of the 1099-K to the IRS. You get a copy, and the government gets a copy. You’ll use the form when you file your taxes. The form is part of filing your taxes, but is not necessarily something you’ll owe taxes on in full or in part. That’s a separate question a qualified tax preparer can help with.
What if I Didn’t Get a 1099-K?
There could be several reasons. First, this is a new law, so some mistakes are possible. It’s also possible that the company determined based on amount or something else that they weren’t required to produce one for you. Keep in mind, just because you did not get a form does not mean you do not owe any tax. It is possible to have activity that the IRS would say you owe tax on but did not meet the criteria to get a 1099-K sent to you.
Are the New 1099-K Rules for Minors (Teenagers) Too?
Yes. There’s no exemption for minors on these requirements. It Is possible your teenager who had a modest babysitting job and was paid via Venmo will get a tax form. If your first thought is that’s ridiculous, you’re correct. Unfortunately, those are the current rules. If your teen receives a 1099-K, a qualified tax professional or tax software can help you reconcile how to file and account for this.
"And he said to them, “Collect no more than you are authorized to do.”" Luke 3:13 ESV
I Heard a Friend Recommend You Should Just Say All Payments Are To/From Friends to Avoid a 1099-K, Should I Do That?
The Terms and Conditions or Terms of Service you agree to when you use a payment app expressly prohibit misclassifying payments. Your payment app can take actions against you such as closing your account without notice or banning you from the service. You should also remember that just because you don't receive a 1099-K doesn't mean the IRS exempts you from taxes. The IRS considers the question of whether something is taxable to be entirely separate from whether there is a 1099-K from a payment company or not. Also, remember the IRS does not look favorably upon anyone who has even the appearance of avoiding the rules.
Income on a 1099-K is Not Always Taxable
Just because something is reported to the IRS does not mean the entire amount or part is taxed. If you receive a 1099-K, you do need to file as part of taxes. The question of taxes is separate, but still very important.
For example, a family buys a couch for $1,000. After several years, they have decided to sell it. A neighbor buys the couch for $800 via PayPal. The family can expect a 1099-K that shows $800. When the family files their taxes, they will be able to explain they sold an old couch for less than what they paid and expect to owe no taxes on the $800.
In another case, Jane sells custom mugs with personalized designs she makes with her Cricut machine. She sold $1,000 wort of mugs using Venmo. Jane can expect to receive a 1099-K that shows $1,000. Because Jane kept good records, she files her taxes to show she had expenses like driving to get materials, cost of mugs, art supplies, and other expenses. Her tax return shows that her $500 of expenses mean she ends up with $500 that is taxed.
Common Scenarios Involving Form 1099-K
We've listed below some scenarios involving folks who did or didn't get he 1099-K form. Please be aware the examples below are simplified. A payment app you've used may apply rules in a different way and the same goes for the IRS. We recommend you consult with a qualified professional to get guidance on your specific and unique situation.
Scenario #1: Part Time Etsy Seller
Example: Sara sells crafts on Etsy. Her customers paid her with a credit or debit card on Etsy. Her total sales for the year were $700.
Should Sara expect a 1099-K form?
Yes, she can expect to receive a 1099-K.
Scenario #2: Teenage Babysitter Who Accepts Venmo
Example: Madeline is 15 years old and babysits a few times a month. Families pay her with Venmo and mark the payments as goods & services. Madeline received $650 for the year for babysitting.
Should Madeline expect to receive a 1099-K?
Yes, she can expect to receive a 1099-K. Even though Madeline is a minor, her family can expect to receive a 1099-K.
Scenario #3: Woodworking on the Side with Multiple Payment Apps
Example: John does woodworking and sells his work from time to time. He uses several different apps to accept payments. For the year, he received $500 via one app and $100 on another.
Should John expect to receive a 1099-K?
John should not expect a 1099-K. This is because he did not receive $600 or more from a single payment company. Note this is specific to whether or not he receives a tax form. The question of whether or not John owes any taxes is a separate matter.
Scenario #4: Reimbursed for a Church Outing
Example: Jennifer coordinated an outing for a group at church. She paid for a reservation to play laser tag and everyone reimbursed her via her preferred payment app. She received $800 and the app recorded every transaction as “personal”.
Should Jennifer expect to receive a 1099-K?
Likely not. The payment company is not required to send a 1099-K if payments are considered something other than “good & services.”
Scenario #5: Selling on eBay for a Profit
Example: Dennis sees that one of his Pokémon cards has gone up in value and decides to sell it on eBay. A card he originally bought for $100 sells for $750 on eBay.
Should Dennis expect to receive a 1099-K?
Yes, Dennis can expect to receive a 1099-K. Because he made a profit, the IRS will also expect Dennis to pay some tax on the sale.
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