If your business receives funds through Venmo, Cash App, PayPal or similar payment processors, you should be aware that the reporting requirements have been lowered.
The amount of money received by an account in a calendar year from any processor that triggers the issuance of a 1099-K, referred to as the reporting threshold, was lowered to $600. This change began with the calendar year that started Jan. 1, 2022. The 1099-K is sent to the recipient of funds and the IRS.
What does this mean to your business?
Let us take a brief look at the history of such information reporting. Starting in 2012, the IRS implemented reporting requirements on credit card and third-party payment processors such as Venmo, Cash App and PayPal. The 2021 reporting threshold to issue forms 1099-K was more than 200 transactions and a total of at least $20,000.
However, beginning Jan. 1, the reporting threshold was lowered to a total of at least $600 for the calendar year, with no minimum number of transactions needed. This change was created by the American Rescue Plan Act of 2021.
What has not changed?
This reporting threshold change does not change what is or is not taxable income. Gross receipts are still gross receipts, even if they are not reported on a form 1099. Only the reporting threshold requirement has changed. Third-party service processors are implementing steps to distinguish commercial payments from those that are purely personal.
What can your business do to make this easier?
Make sure you have separate accounts. Separate accounts for your business transactions and your personal transactions will keep the records cleaner. Commingling business and personal transactions in one account makes reporting more difficult and may cost time and money to sort out what funds received belong to whom.
Comply with the service provider’s request for information. Service providers are required to comply with the new IRS requirements and may hold account funds if not provided the information needed. Furthermore, they are required to send backup withholding if no tax identification number is received. This means the service processors can withhold federal income tax from the payments received in your account and send them to the IRS. The business would then claim those as taxes paid on the applicable income tax filing. Currently, the backup withholding percentage is 24%.
What if my business pays vendors by credit card or through a processor such as Cash App credit card or third-party payment processors?
Here is good news! Using one of these payment processors to pay vendors may reduce the number of 1099s your business needs to issue. Payments made by credit card or through a processor such as CashApp or other third-party payment processor to vendors for goods or services used in your business are not subject to 1099-NEC or 1099-MISC reporting requirements.
As always, keep good records. They may be needed to support reported amounts.
This information is general in nature and is not intended as legal, accounting, or tax advice provided by BUSBooks LLC to the reader. This material may not apply to the reader’s specific circumstances and may require consideration of additional factors. BUSBooks LLC recommends that the reader contact a tax professional before taking any action based on this information. BUSBooks assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect this information.
UMA Member Tracy Fickett, CPA, operates BUSBooks, a specialty accounting firm dedicated to the motorcoach industry. If you have a question, you can reach her at firstname.lastname@example.org.
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