As the year-end approaches, there’s been debate around tax reporting for business transactions on payment apps such as Venmo and PayPal, along with e-commerce companies, such as eBay, Etsy and Poshmark.
Some lawmakers are pushing to increase the IRS reporting threshold for Form 1099-K, which covers third-party business payments. 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 at tax time detailing that income if their transactions exceed the threshold.
The American Rescue Plan Act of 2021 dramatically reduced the threshold, and now lawmakers are looking to change course.
“There’s bipartisan interest in the backslide because of all the misinformation that’s 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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Before this year, you may have received Form 1099-K if you had more than 200 transactions worth an aggregate above $20,000. But the 2023 threshold is just $600, and even a single transaction can trigger the form.
That change is expected to result in a flood of Forms 1099-K in early 2024 when taxpayers typically receive so-called “information returns” from employers and financial institutions. Duplicate copies go to the IRS.
The threshold doesn’t apply to personal transfers on apps like Venmo and PayPal, such as sending a friend or family member money. But experts have expressed concern that some taxpayers may now receive a 1099-K by mistake, creating headaches at tax time.
And given that just one transaction above $600 is enough to trigger the form, even someone who makes a one-off sale of, say, an old couch or hot concert tickets could find themselves with an extra tax document to contend with.
The lower 1099-K reporting thresholds have been controversial amid increased scrutiny of the IRS, particularly among online sellers, gig economy workers and others who worry about confusion and higher taxes.
There’s bipartisan support for the change
The lower Form 1099-K thresholds were originally slated for 2022. But the IRS delayed the rule in late December, to “help smooth the transition and ensure clarity” for taxpayers and professionals.
Now, with the tax season fast approaching, there’s a legislative push from both chambers to increase the 2023 reporting threshold.
The Republican-led House Ways and Means Committee in June approved legislation to revert the reporting thresholds back to 2022 levels. There are also proposals in the Senate, including the Red Tape Reduction Act, introduced by Sens. Sherrod Brown, D-Ohio, and Bill Cassidy, R-La., in May, which aims to raise the threshold to $10,000.
But advocates say the lower 1099-K threshold will reduce taxpayer burden. “[Information returns] don’t actually increase taxes,” said Rosenthal. “They only help determine taxes already owed.”
Form 1099-K has ‘always been problematic’
Meanwhile, there are lingering worries among tax professionals about the 1099-K change. The American Institute of CPAs in June renewed its support for raising the reporting threshold to avoid “significant confusion in the tax system.”
In a June letter endorsing the Senate’s Red Tape Reduction Act, AICPA voiced concerns about an administrative burden for taxpayers and the IRS, especially if Forms 1099-K wrongly include personal transactions, such as gifts or reimbursements.
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-based enrolled agent and immediate past president of the New York State Society of Enrolled Agents. “Even in its older iteration with the higher thresholds and number of transactions, a lot of times it just didn’t accurately reflect what should be taxable income.”
For businesses selling goods, she said Form 1099-K may not accurately reflect returns or adjustments. “But if the IRS has a document that says ‘X,’ and you’re saying ‘Y’ on your tax return, it may provoke more scrutiny, which is another level of time, expense and aggravation that people don’t need,” Kubey said.
How to prepare for the 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 “be familiar with the systems,” know where to access payment information and to keep your account open, said Albert Campo, a certified public accountant and president of AJC Accounting Services in Manalapan, New Jersey.
“Our biggest piece of advice is to make sure you get the [payment] information as soon as you have it available,” which may save time next filing season, he said.
This article was originally published by a Cnbc.com. Read the Original article here. .