In an effort to capture unreported income flowing through third-party settlement organizations (TPSOs) such as Amazon, PayPal/Venmo, card payment processors and other marketplaces, the IRS requires these organizations to report payments made to sellers through their platforms on Form 1099-K.
The purpose of the new law is to uncover merchants that do not report all of their income by comparing the 1099-K amounts to the amount reported on the individual’s or business’s tax return and following up with the under-reporters by correspondence or by audit.
Before January 1, 2022, the filing threshold for 1099-Ks was when the gross amount of total reportable payment transactions during a calendar year exceeded $20,000 or the aggregate number of transactions for that payee in that year exceeded 200. In the past, smaller businesses and individuals selling merchandise on the Internet directly or through the likes of Etsy, E-Bay, Square and others may not have received a 1099-K.
Vacation rentals through VRBO and other TPSOs might have eluded the required 1099-K reporting due to the 200-transaction threshold. Individuals providing services through Internet websites, such as for delivery, babysitting, house cleaning, senior care, and other services, seldom met the $20,000 threshold and have not received 1099-Ks in the past.
That will all change beginning in 2022 for reporting in 2023. The American Rescue Plan Act (ARPA) of 2021 included a provision reducing the reporting threshold to $600 and eliminating the 200-transaction minimum for transactions generated after January 1, 2022. The amendment clearly specifies the reporting only applies to transactions for goods and services. 1099-K reporting is not meant for transactions such as sending money to students or reimbursing family or friends for dinner.
The 1099-K only reports gross income. The cost of the products sold and other business expenses can be deducted from gross income to determine a merchant’s net taxable profit on their tax return. Those renting vacation homes through TPSOs can deduct depreciation, utilities, repairs, and other expenses, while those providing services can deduct certain travel and other expenses. The net profits are subject to income tax, and generally are also subject to self-employment tax, including rentals where significant personal services are performed.
Keeping accurate records of income and expenses is important for even the smallest business plan or side hustle. If you question how this affects your specific situation or which expenses could be deductible, please feel free to contact one of our CPAs at (616) 642-9467 or request a complimentary accounting consultation.
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