IRS $600 Rule on Reporting Payments from Third-Party Apps
The IRS requires companies to report certain payments to the IRS and the appropriate individuals or businesses to help ensure taxes are paid on all relevant revenue.
Before the tax year 2022, IRS Form 1099-K, Payment Card and Third Party Network Transactions was a form that helped the IRS accomplish this goal.
This form required third-party payment platforms to report payments if both of the following reporting thresholds were met in a year:
- Gross payments exceed $20,000 in goods and services transactions
- Over 200 business transactions
Most individuals selling items on the side didn’t receive a Form 1099-K due to these high reporting requirements.
This changed when the American Rescue Plan of 2021 became law.
Now, there is a lower threshold.
This lower threshold could trigger many everyday Americans selling items at yard sales or other similar situations to receive a Form 1099-K for the calendar year 2022 tax year. Thankfully, the IRS delayed the new requirements until the 2023 tax year.
Here’s what you need to know about the rule and the current delay.
What is the New $600 1099-K Rule?
The new 1099-K rule removes the old requirements and replaces them with a much simpler threshold.
The IRS states that third-party settlement organizations must issue Form 1099-K for “any participating payee that exceed a minimum threshold of $600 in aggregate payments, regardless of the number of transactions.”
This is a threshold much lower than the old $20,000 and 200 transactions limit. Someone that sells an expensive piece of furniture or a car through PayPal could exceed this limit through a single transaction.
However, the IRS issued notice 2023-10. It states this new requirement would not be required to be followed until the 2023 tax year.
Third-party settlement organizations would not be penalized if they follow the old rules for the 2022 tax year. The IRS does not require these organizations to use the old standards, though.
If a third-party settlement organization already updated all of its systems to follow the new rule, it could still report under the new rules if they wish.
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Additionally, some states have issued rules requiring lower thresholds for Form 1099-K reporting. Companies may have to follow these rules depending on what state they’re located in and where you live.
It’s also important to note that the delay doesn’t change your responsibility to report all taxable income. If you received taxable income, you’re still required to report it whether you receive Form 1099-K or not.
Apps and Platforms That May Trigger Form 1099-K
If a company qualifies as a third-party settlement organization, it must follow the 1099-K rules.
Here are a few examples of times you should receive a Form 1099-K in 2023 and future years, assuming you exceed the $600 limit.
PayPal
PayPal has two different types of accounts.
If you have a business account, all transactions count toward the Form 1099-K limit. Crossing the threshold will result in a 1099-K form.
PayPal personal accounts should, in theory, work differently. When an individual sends you money, they can tag it as a friends-and-family transaction or as a goods-and-services transaction. Only goods and services transactions should count for the 1099-K limits.
Facebook Marketplace also offers the option to use PayPal for payments, so keep this in mind.
CashApp’s Cash for Business
CashApp offers two types of accounts.
Only CashApp’s Cash for Business accounts should receive a Form 1099-K if they exceed the threshold.
Venmo
Venmo works much like PayPal’s personal accounts.
Users sending money can designate if money is being sent for goods and services. If you receive over $600 of goods and services payments, Venmo will issue you a Form 1099-K for these transactions.
Platforms like Etsy, eBay, and Airbnb
Platforms that process payments on your behalf and allow you to sell items or receive money for services likely fall under the Form 1099-K requirements. This includes websites like Etsy, eBay, and Airbnb.
Examples of When You Shouldn’t Receive a Form 1099-K From a Platform
Not all transaction types qualify you to receive a Form 1099-K. Here are specific instances where you should not receive a Form 1099-K.
Zelle
Due to the way Zelle works, Zelle has determined it is not required to issue Form 1099-K for any payments.
PayPal
You should not receive a Form 1099-K for payments that are reported as friends-and-family payments. This only works for personal PayPal accounts.
Venmo
Venmo should not report any transactions that are not marked as goods and services on Form 1099-K.
CashApp
A personal CashApp account should not report funds received on a Form 1099-K.
What Taxes You May Owe If You Receive Form 1099-K
The taxes you owe on income reported on Form 1099-K depend on the type of income you received.
You may have to pay income tax or capital gains tax on certain transactions. If the income is business income, you may have to pay self-employment taxes. State and local taxes may also apply.
Many circumstances can exist and sometimes you have a mixture of many of them. The below is not tax advice for any specific situation. Please contact a tax advisor for specific advice for your circumstances.
Personal items sold at a loss
Personal items sold at a loss should not result in tax due. You must still report this on your tax return.
General guidelines suggest reporting this on Form 1040, Schedule 1 of your income tax return. You could report income on Line 8z - Other Income. You could then report an adjustment on Line 24z - Other Adjustments to result in a net zero income.
Personal items sold at a gain
Personal items sold at a gain are considered taxable income. You generally report this as you would any other item sold at a gain by using Form 1040, Schedule D.
Business income
If you run a business, you may also receive Form 1099-K for payments received.
If your business has a formal entity, you should have inputted your business’s EIN and the business should receive the form.
You would report this income as it applies to your business. You may also have deductible expenses that relate to that income to lower the tax burden.
Not all businesses have formal entities. If you’re a sole proprietor, you would have provided your Social Security number and personally received the Form 1099-K.
Business income in this situation is usually reported on Form 1040, Schedule C. Any related expenses can offset part or all of this income.
The Impact on a Person Who Receives a Form 1099-K
If you receive a Form 1099-K, what impact will it have?
Taxpayers who receive this form need to report the income on their tax return. The IRS receives this information, as well.
If you don’t report it, the IRS may start asking questions or automatically adjust your tax return.
Essentially, this means you need to closely track all transactions that may result in a Form 1099-K.
You need to track why you received the money. If you sell an item, you need to have documents stating what you originally paid for that item.
This way, you can easily report all Form 1099-K income in the proper places on your tax return and pay any applicable taxes due.
Many individuals that only sell items at a loss should not have any additional tax impact.
Still, you have to report the information or the IRS may assume otherwise.
This new rule will mostly impact people who receive payments through payment platforms, such as PayPal, or websites that process payments for you, such as eBay and Airbnb. It should not impact individuals working as contractors for companies such as Uber or Lyft.
Remember:
The tax rules for what counts as income haven’t changed.
All of this information should have been reported in the past. The IRS just didn’t have any easy way to track if you didn’t.
Avoiding Form 1099-K May Backfire
Some individuals may decide to try to avoid receiving Form 1099-K. They may decide to only use services that won’t report the payments, such as Zelle or PayPal friends and family transactions.
This could backfire.
These services don’t offer buyers recourse if things don’t go as they should. Adopting this mindset could reduce sales as buyers may feel a higher risk of being scammed, which could reduce your sales.
Even if you don’t receive a Form 1099-K, the income may still be taxable. The IRS could audit your tax return even if you don’t receive a Form 1099-K. If they find unreported income, you could owe taxes, interest, and penalties.
Consult a Tax Professional
If you receive an IRS Form 1099-K, it’s best to consult a tax professional. They can help you properly identify how to report the income you receive on this form, as well as any deductions you may qualify for.
If you believe you have received a Form 1099-K in error, they can help you attempt to get the form corrected. Sadly, this will likely be difficult as you’ll be trying to contact the payment settlement entity (PSE), which is likely a massive company. Still, the IRS requests you take this step.
