The American Rescue Plan essentially modified Form 1099-K reporting requirements for third-party payment networks (such as Cash App), which previously had been based on credit and debit card payments. Now, it actively includes electronic payment transfers as well. These networks process payments and have exploded over the last several years.
This means you’re going to have multiple clients that have Form 1099-Ks. It’s important to be consistently up-to-date on the way reporting requirement changes will affect 2022 taxes.
Form 1099-K: A Review
Every single payment received by way of payment settlement entities (PSEs) is detailed on a Form 1099-K. “Entities” includes payment credit cards like debit and credit cards, alongside payment networks from a third party, such as Venmo. The form can be sent to businesses (using their Tax Identification Number or TIN) and individuals (using their Social Security number).
Clients should get a separate Form 1099-K from every PSE where the client’s number of transactions or gross payments went beyond the reporting threshold.
Changes in Form 1099-K For the Year 2022
The most notable 1099-K requirement change involves the de minimis threshold for payment networks that are third-party. During tax years prior to 2022, networks only had to send a Form 1099-K if a business or individual had over 200 transactions and got more than $20,000 in gross payments.
For this year onwards, however, third-party payment networks now have to send out 1099-Ks to anyone who has any number of transactions alongside over $600 in gross payments.
Given the major downturn in the reporting threshold, filing 2022 tax returns will involve a lot more Form 1099-Ks coming in. The new laws also attempt to ensure more accurate tax returns from smaller businesses or individual taxpayers who were not previously subject to 1099-K reporting requirements.
It should be noted that the changes apply to third-party payment networks only. Card payment reporting requirements, on the other hand, are still the same.
Payments that come from debit or credit cards have never been subject to a de minimis threshold. As a result, a Form 1099-K must be sent by PSEs to anyone and everyone that gets them.
Individuals will need to file a Schedule C (Form 1040) while businesses should file Form 1065, 1120, or 1120S (depending on the structure of their business).
Will 1099-Ks Be Sent Out To Clients for Personal Transactions?
Personal transaction reports should not be a concern. If a client receives over $600 in reimbursements through an app like Cash App, for example, but it’s all from family and friends and linked to events such as eating out, don’t fret. That transaction and others like it are excluded from the reporting requirements. Clients should not be receivers of a 1099-K in that case.
Typically, third-party payment networks are able to differentiate personal and business transactions based on short questionnaires asking if the transaction is for the service or good. Another solid basis often used for this is user agreements.
Conclusion
Form 1099-K is a crucial document that previously only covered debit and credit card payments. For 2022, it’s been updated to include third-party payment networks like Cash App and Venmo. It should be noted that personal transactions do not require 1099-Ks.
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