Most businesses know that Form 1099 NEC (non-employee compensation) is required for services over $600. However, in 2021 the American Rescue Plan Act included a provision to require Form 1099-K for all funds transfers on sites like Venmo, PayPal, eBay, and Etsy. Form 1099-K had previously only been used for significant amounts of credit card transactions, like for restaurants or retailers. There was a significant amount of media coverage and speculation about the intent.
The challenge with the legislations was that many transfers on these sites are exempt transfers or reimbursements between friends or family for routine items such as dinner or a gift. Some crafters are barely making any profit and when allowable deductions are considered, they are realizing losses. Those losses are called hobby losses and are not reportable or deductible on taxes. The intent wasn’t to capture reporting on these items but on the many business transactions conducted on these sites that weren’t being properly reported as business income. The tax law wasn’t written with these other transactions in mind and therefore the IRS needs to issue guidance on how to capture only taxable business transactions. Because the IRS remains millions of tax returns and pieces of mail behind, this guidance hasn’t happened.
The IRS has just announced that Form 1099-K will NOT be required for these transactions for 2022 and that the pre-2022 threshold of more than 200 transactions worth a combined amount over $20,000 will remain in effect for another year. That does not change the reporting requirement for any other type of 1099 form. Other forms are still required by their individual due dates.
Acting IRS Commissioner, Doug O’Donnell says this is to relieve confusion around the process and what will be considered income; however, there was a significant amount of pressure from the American Institutes of Certified Public Accountants (AICPA) and the National Taxpayers Union Foundation to raise the threshold to prevent reporting on exempt transactions or low-level online activity. The AICPA suggested $5,000 as an appropriate threshold. This is welcome news for taxpayers and tax professionals alike as the IRS had yet to issue any guidance on reporting or tracking forms received for exempt transactions like paying a friend for dinner or sending money to a grandchild for their birthday.
Some taxpayers may have already received forms and the IRS has promised updated guidance on what to do with those forms if they have already been received. If you have received a form 1099-K we recommend waiting to file your tax return until the IRS issues this guidance. The guidance will likely be issued in January or February but make sure to have your CPA extend your return to be safe. We will continue to watch for the guidance and will be ready to assist you when it is issued.
