Some lawmakers want to increase the 1099-K tax reporting threshold

As we approach the end of the year, there’s a debate surrounding tax reporting for business transactions on payment apps like Venmo and PayPal, along with e-commerce companies like eBay, Etsy and Poshmark.

Some lawmakers are pushing to increase the IRS reporting threshold for Form 1099-K, which covers business payments from third parties. Taxpayers who use a payment app to process transactions for a side hustle or small business, or who sell a product or service through an e-commerce site, will receive a Form 1099-K detailing that income at tax time if their transaction exceeds the threshold. .

The American Rescue Plan Act of 2021 dramatically reduced the cap, and now lawmakers want to reverse course.

“There’s bipartisan interest in rollback because of all the misinformation out there,” said Steve Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center, who addressed the issue on CNBC’s “Squawk Box” last week.

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How the tax rule change affects payment app users

If you had more than 200 transactions totaling more than $20,000 before this year, you may have received a Form 1099-K. But the 2023 cap is only $600, and even one transaction could trigger the form.

The change is expected to trigger a flood of Forms 1099-K in early 2024, when taxpayers typically receive so-called “information returns” from employers and financial institutions. Duplicate copies are sent to the IRS.

The limit does not apply to personal transfers on apps like Venmo and PayPal, such as sending money to a friend or family member. But experts have expressed concern that some taxpayers may now receive a 1099-K in error, causing headaches at tax time.

And given that a transaction above $600 is enough to trigger the form, even a one-off seller of an old couch or hot concert tickets may have an extra tax bill to wrangle.

Lower 1099-K reporting thresholds have been controversial amid increased IRS scrutiny, particularly among online sellers, gig economy workers and others worried about confusion and higher taxes.

There is bipartisan support for the change

The lower Form 1099-K thresholds were originally set for 2022. But the IRS delayed the rule in late December to “smooth the transition and provide clarity” for taxpayers and professionals.

Now, with tax season fast approaching, there is a legislative initiative from both chambers to raise the 2023 reporting threshold.

The Republican-led House Ways and Means Committee approved legislation in June to restore the reporting threshold to the 2022 level. Also in the Senate are Sens. Sherrod Brown, D-Ohio, and Bill Cassidy, R-La. proposals, including the Red Tape Reduction Act, introduced in May by the

But advocates say the lower 1099-K threshold will ease the burden on taxpayers. “(Information returns) don’t actually raise taxes,” Rosenthal said. “They only help identify taxes that are already owed.”

Form 1099-K ‘has always been problematic’

Meanwhile, there are concerns among tax professionals about the 1099-K changes. The American Institute of CPAs renewed its support for raising the reporting threshold in June to avoid “significant confusion in the tax system.”

In a June letter approving the Senate Red Tape Reduction Act, the AICPA expressed concerns about the administrative burden on taxpayers and the IRS, particularly if they incorrectly enter personal transactions such as gifts or compensation on Forms 1099-K.

Form 1099-K has always been problematic.

Phyllis Jo Kubey

Immediate Past President of the New York State Society of Enrolled Agents

“Form 1099-K has always been problematic,” said Phyllis Jo Kubey, a New York registered agent and past president of the New York State Society of Registered Agents. “Even in its older iteration, with its higher thresholds and number of transactions, it often did not accurately reflect what taxable income should be.”

For businesses that sell goods, he said, Form 1099-K doesn’t accurately reflect returns or adjustments. “But if the IRS has a document that says ‘X,’ and you say ‘Y,’ on your tax return, that can lead to more investigation, which is another level of time, expense and aggravation that people don’t need,” Kubey said.

How to prepare for a 1099-K reporting change

Even if you don’t receive a Form 1099-K, business payments are still taxable, and experts say it’s a good time to start getting organized.

Regardless of the payment platform, it’s important to “get to know the systems,” know where to access payment information, and keep your account open, said Albert Campo, a certified public accountant and president of AJC Accounting Services in Manalapan, New Jersey.

“Our biggest tip is to make sure you get the (payment) information as soon as you have it,” he said, which could save time next filing season.

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