Tax Surprise Coming to Many in January 2024: Changes to Form 1099-K Reporting
Author: Jennifer Climo
(Note - this post edited to change the effective date in accordance with the IRS change in policy posted in December, 2022)
If you use Venmo, Cash App, PayPal, eBay, etc., to send or receive payments, this may apply to you!
U.S. tax law states that “gross income is ALL income received from whatever source derived.” Some people are under the false impression that if you do not receive a Form 1099 or federal W-2 form, you do not need to report the income. That is a dangerous perception, considering the severity of tax penalties for knowingly underreporting your income to the Internal Revenue Service (IRS).
The “tax gap” in the U.S., defined as the difference in the taxes owed versus the taxes that were paid, was estimated at over $600 billion in 2020. The IRS has taken steps to reduce the tax gap, and one way is by reducing the threshold at which businesses and individuals must file Form 1099-K to report payments.
Tax Form 1099-K was created in 2011 to report receipts of funds from credit card companies to businesses and individuals with payments received greater than $20,000 or more than 200 transactions per year. Subsequently, those thresholds have been reduced to $600 in payments received and with no minimum transaction level, respectively.
Receiving money using third-party settlement organizations (TPSOs) like Venmo, Cash App, eBay, PayPal, etc.
Banks, credit card companies, and third-party settlement organizations (like Venmo, Cash App, Western Union, auctioneers, Uber, eBay, PayPal, Amazon, Airbnb, and many others) will send a Form 1099-K for any transactions they have identified as “goods and services.” Venmo recently separated its transaction types to distinguish between reimbursements between family and friends, and payments for goods and services.
Payments for goods and services, such as a haircut or ice cream, are taxable income. A $20 reimbursement from your friend because you bought them ice cream is not taxable income. Some vendors try to get around this by asking you to code their tip or other payment in Venmo as reimbursement. This is an example of tax fraud and part of the tax gap Congress is trying to close.
Human nature being what it is, there are bound to be many miscoded transactions on tax year 2023 1099-K tax forms, resulting in a lot of needless tax reporting. The IRS often does tax form matching, comparing tax forms received to income reported on tax returns. Differences can result in automated billing notices or tax audit letters being generated for taxpayers. If you receive a Form 1099-K in error and cannot get the payment processor to correct and reissue the form, the IRS recommends you note on your return that the payments were reimbursements, not goods and services, and therefore not reportable on the tax return.
Everyone who accepts credit card payments for the sale of goods or services online and collected more than $600 in 2023 will receive a 1099-K form. If you provide the form to your tax preparer, you now may have created a sole proprietorship business, and need to give your preparer a lot more information, including:
- Type and description of business
- Cost of everything that was sold
- List of other expenses
If you did not intend to run a business and were just selling personal items, the tax law does not treat you kindly. Sales of items sold at a profit must be reported as taxable income. Losses from sales of personal items are not deductible and cannot be aggregated with those sold at a profit.
Crowdfunding (online solicitation)
You have probably seen, or even contributed to, a crowdfunding campaign online, such as helping a family who has fallen on tough times or has a sick child. Other sites help struggling artists collect fees from fans to help them expand their work. These sites include GoFundMe, Kickstarter, Patreon, and many others. The campaign organizer will receive a Form 1099-K if they collect more than $600 during 2023.
Just because you receive a 1099-K form does not mean that you are required to pay taxes on the income. Gifts are not taxable income. However, large gifts (in excess of the annual gift tax limits)1 are subject to gift tax rules. Gift tax rules are beyond the scope of this article.
If you initiate a crowdfunding campaign, it is especially important that you keep detailed records of all the payments received and whatever is spent for the calendar year. You should also make sure to pay out the net income in the same tax year as you collect it, for tax reporting simplicity.
Domestic service employees (babysitters, house cleaners, gardeners, etc.)
The same rule that impacts sellers of goods and services, and online solicitations also affects domestic service providers (aka “household employees”) such as nannies, gardeners, house cleaners, etc. A TPSO (such as Venmo) will send a 1099-K form to a domestic service provider such as your babysitter, and the recipient (your babysitter) is responsible for reporting the income. However, if your babysitter qualifies as a domestic service employee, you may be penalized for not properly reporting their wages on your tax return.
This rule is not applicable to companies that provide domestic services but does apply to individuals working directly for you. The household employee rule is not new. If you pay a domestic service employee (also known as a household employee) more than $2,400 in 2022 ($2,600 for 2023), then you must report their wages on your tax return3 and pay Security (FICA) and state unemployment taxes on behalf of that individual, and issue them a Form W-2. Some people choose to use a payroll service for this.4 The details of the household employee rules are beyond the scope of this article but can be found here.
If you use an app such as those mentioned above to pay your babysitter or house cleaner and exceed the $600 payment limit, they will now receive a Form 1099-K for the payments. This is not a new tax, but it is a new reporting requirement. They have always been required to report their income on their tax return.
The new Form 1099-K reporting rules will be a major surprise for many people this coming tax season. Plan how you will handle this situation now, so you are not surprised at tax time. Reach out to your tax preparer with any questions.
The IRS has posted a few questions and answers regarding this rule that you may find helpful. If you are selling goods and services online or paying for services using a TPSO, I suggest you review this carefully.
As with everything to do with tax law, this is a complicated area, and this article is not a comprehensive analysis. Talk to your tax preparer or financial advisor for more information.
1 $16,000 per person in 2022 and $17,000 per person in 2023
2 Domestic service employees are reported on Schedule H to your 1040
3 Reporting on Schedule H of your 1040
4 If you are filing payroll tax forms such as Form 941 to report the wages and payroll taxes, then Schedule H is not required.
Jennifer Climo, CFP®, CPA, MSFP is an advisor at Milestone Financial Planning, LLC, a fee-only financial planning firm in Bedford, NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our clients’ interests first. If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisors.