1099K Reporting 2024
There has been another delay in the change of the 1099K reporting. It has also caused more confusion for payors to know if they should issue a 1099K or a 1099-NEC to a provider. Let’s chat about how we got here.
Backstory on 1099K Reporting Change
In December 2020, the Treasury Inspector General of Tax Administration (TIGTA) released the results of a study and found that a lot of taxpayers, who did not meet the 1099K threshold, were not reporting their income. You can read more about the study here.
1099K Requirements
Prior to 2022, the requirements for a third party payment settlement entity (PSE) to file a 1099K were if a payee exceeded $20,000 AND 200 transactions ~ § 1.6050W-1(c)(4)(i)(ii). PayPal, Stripe, Amazon, or EBay are examples of PSEs. Here are a few examples of 1099K reporting.
Example 1: Business owner A used Stripe for payment processing. A earned $150,000 but only had 10 transactions. Stripe was not required to issue a 1099K.
Example 2: Business owner B sold on EBay. B had 250 transactions, but only earned $15,000. EBay was not required to issue a 1099K.
Example 3: Business owner C provided a service and used QuickBooks for invoicing. C earned $25,000 and had 201 transactions. QuickBooks was required to issue a 1099K.
Regardless of whether a taxpayer meets the threshold for 3rd parting reporting, the taxpayer is still required to report the income. All income is taxable unless it is specifically exempted by law. ~§61
Taxpayers became more savvy, and actively avoided 1099K reporting by using different PSEs to stay below the reporting threshold. The legal term for that is structuring, which is illegal.
To combat underreporting income, the IRS proposed lowering the reporting threshold to $600 to match the 1099-NEC threshold. PSEs (and the public) lost their minds. Suddenly it was viewed that the government was now coming to tax income that wasn’t previously taxed. That was NEVER the case. Taxpayers were not reporting their income as required.
States 1099K Reporting Requirements
Even though Federal Laws have not changed, some states have reduced their 1099K filing requirements. Washington DC, Virginia, Maryland, are a few states that have a $600 threshold for 1099K filing. You can review a complete list of state 1099K requirements here. That means if you live in one of the states with reduced requirements, you'll receive a 1099K, even though it's less than the Federal requirement.
1099K vs 1099-NEC
As the discussion raged about the 1099K, so did confusion about whether one should issue a 1099-NEC to service/product providers or if the 1099K would suffice. A 1099K covers digital payments like credit cards, debit cards, or on third party platforms like the ones listed above. A 1099-NEC is used for payments through cash, ACH, or paper checks.
Example: Let’s assume you pay a landscaper $650 by check, you may be required to issue a 1099-NEC. Note: 1099-NECs are not issued to corporations.
Let’s assume in the same example you paid the landscaper $650 by credit card. The payment processor is required to issue the 1099K when the user reaches 1099K thresholds. You would not be required to issue a 1099-NEC.
When people are confused about the law, they issue the 1099-NEC to be on the safe side. While that may seem like the best thing to do, it really isn’t. You create an issue of double-reporting when you issue a 1099-NEC that is not necessary.
The IRS looks at the amounts reported on 1099Ks and 1099-NECs and adds them up. If the reported gross income is less than the 3rd party amounts reported, the taxpayer will receive a notice of underreported income (CP2000).
Example: You paid a contractor $20,000 via credit card, and issued a 1099-NEC. The payment processor also issued a 1099K for $160,000 (that includes the $20,000 you paid by credit card). In the IRS’s view, the contractor earned $180,000, when in reality only $160,000 was earned.
If you have questions concerning the 1099K, check out the IRS updated 1099K FAQ.
If you have an issue with unreported income, click here to schedule an appointment with us!
