You may have heard that the
IRS recently delayed a 1099 reporting rule that was going to otherwise affect a
lot of people this filing season.
We are talking about payments
apps such as Venmo, PayPal, Square and Cash App. Use Lyft or Uber, purchase
something on Etsy or buy lunch at a food truck and you are likely paying cash or
using one of these payment platforms.
For years and years, the
tax rules require a payment processor to issue a 1099 to a business if two
things happened:
(1) The business
received payments exceeding $20,000 and
(2) There were more
than 200 transactions.
This flavor of 1099 is a
“1099-K.” It basically means that one received payment for a business
transaction by accepting a credit card or mobile payment app. Mind you, this is
not the same flavor of 1099 as those for interest or dividend income, rent or stock
sales. A 1099-K is issued to a business, not to an individual. However, an
individual having a business – think a side gig – can receive a 1099-K for that
gig. Think Uber or Etsy – or a teenage babysitter – and you get the
distinction.
I remember when the $20,000/200
rule came in. There was one year when the IRS wanted taxpayers to separate
business revenues on their tax return between those reported on a 1099 and
those not. Clients were not amused with locating and providing those 1099
forms. Preparers quickly adjusted by reporting all revenues as reported on a
1099, despite IRS protestations that it would render their computer matching
superfluous. True, but preparers cannot spend a lifetime preparing one tax
return because Congress and the IRS want a DNA match on any economic activity
during the year.
Congress changed the $20,000/200
law. The American Rescue Plan of 2021 reduced the dollar threshold to $600 in
the aggregate, with no threshold on the number of transactions.
Fortunately, some of the
business apps are trying to minimize the damage. PayPal and Venmo, for example,
are allowing users to distinguish whether a payment is personal - think a
birthday gift – or a payment for goods and services. Personal payments do not
require 1099-K reporting.
Many tax professionals were
concerned how this expanded reporting would mesh with an IRS that is just
barely getting itself off the floor from COVID202020212022. The IRS still has
unprocessed tax returns and correspondence to wade through – the same IRS that recently
destroyed millions of tax documents because they relinquished hope of ever
processing them.
The 1099-K reporting has
not gone away completely, though. The IRS delayed the $600 rule, but the old
rule - $20,000 and 200 transactions – is still in effect. Yeah, it can be
confusing.
Have you wondered why that
$600 limit has never changed? The $600 has been around since the Internal
Revenue Code of 1954, and prior to 1954 there was comparable reporting for
certain payments exceeding $1,000. Mind you, average annual U.S. income in 1954
was less than $4,000. You could buy a house for twice that amount.
Had that $600 been pegged
for inflation – not an unreasonable request to make of Congress, which caused
the inflation - it would be almost $6,700 today.
And Congress would not be
burdening everybody with 1099 reporting at dollar thresholds less than you spend
monthly on groceries.
