The changes to Form 1099-K will be implemented in 2022 and will focus on third-party settlement organizations, so tax professionals have some time to prepare.
The American Rescue Plan has been passed to expand the Form 1099-K reporting threshold for third-party settlement organizations. The old rule, which still applies until 2020 and 202, with some modifications, focuses more heavily on a minimum cash balance requirement at 200 transactions per person. This will make it focus on $600 in value of transactions annually.
The IRS has an informative site that provides the basics on 1099-K. They summarize by saying these provisions reach payments from:
- Payment card transactions such as debit cards.
- To settle third-party payment network transactions that exceed the minimum reporting thresholds of $20,000 and more than 200 transactions.
The site not only discusses what steps should be taken if you receive an erroneous statement, but it also explains that the threshold for reporting payments settled through a third-party network is much higher than credit card transactions.
One of the common problems with 1099-K paperwork is that it may include transactions after the date of sale. The following FAQ page from the IRS website might help resolve these issues: https://www.irs.gov/payments/general-faqs-on-new-payment-card-reporting-requirements.
In the case of a payment card transaction, “merchant acquiring entity” refers to banks and other organizations that have contractual obligations towards participating payees in the settlement.
Third-party networks are the subject of much debate, with some questioning whether they involve goods or services. The third-party settlement organization is an institution with the contractual obligation to make payment on behalf of participating payees concerning network transactions.
Under new rules announced this week, all third-party payment networks will be required to report their transactions on a form entitled “Form 1099-K.” The reporting is intended for use only regarding goods or services purchased from vendors who are also participants in the American Rescues Plan. Rent and royalty transactions, which do not involve any property transfer between two parties, must still be reported on Form 1099-MISC instead of on Form 1099-K.
There are many changes that businesses will need to make regarding their procedures for obtaining taxpayer identification numbers. Third-party payment networks are expanding their scope to include third-party reporting income earned by independent contractors. This adjustment will impact large companies such as Amazon. The new legislation requires an updating of these policies and focusing on dollar thresholds and old techniques, which could be inadequate after 2021.
If you are a business owner, it is crucial to know that vendors cannot always distinguish between personal and work transactions. This means if consumers pay for an expense on the same account used in both capacities, then there’s potential they’ll receive two 1099-K forms instead of just one – which could create some problems down the line when filing taxes or otherwise accounting for these payments.
The changes to the federal tax code that was recently signed into law will soon be implemented. These new rules could have significant implications for how you file your taxes, so it’s essential to comply with them and plan by understanding what these changes mean and when they will take effect.
The new federal tax regulations are set to take effect in 2021 but could be delayed due to the state’s conformity. We would expect any changes made by your respective states regarding 6050W to come into play sometime around the same time.