The IRS recently updated its guidance for completing Form 1099-K, a form primarily used by “gig” companies that provide compensation using payment apps or online marketplaces, as well as individuals selling goods on platforms like Etsy. This update comes as part of efforts to promote greater tax transparency and compliance. In 2008, Congress enacted Internal Revenue Code section 6050W, which required certain “third party network transactions” to be reported on Form 1099-K. Initially, no 1099-K was required unless the payee had at least 200 transactions and the amount reported exceeded $20,000.
However, this threshold meant that a significant portion of the gig economy was not being properly reported for tax purposes. To address this issue, Congress amended the 1099-K thresholds, eliminating the 200-transaction minimum and lowering the filing threshold amount to $600, aligning it with other tax forms like the 1099-MISC and 1099-NEC, starting with the 2022 tax year. The IRS delayed the implementation of these new thresholds to 2023 and agreed not to impose penalties unless the old 1099-K thresholds were met. In November 2023, the IRS announced another delay, pushing the implementation of the new thresholds to 2024, sparing the 2023 filing season.
In February 2023, the IRS released a fact sheet updating the Frequently Asked Questions (FAQs) on Form 1099-K that had been issued in March 2023. These updated FAQs aim to expand and clarify information about when a 1099-K payment may or may not be taxable to recipients, among other topics. For instance, the FAQs specify that a 1099-K should only be issued to individuals who sell goods or provide services, not for making purchases. Additionally, a 1099-K should not be issued if a 1099-MISC or 1099-NEC has already been issued for the payment.
The FAQs also provide guidance on specific scenarios, such as gig work. For example, if you are a ride-share driver, you should report your payment as income on Form 1040, Schedule C, Profit or Loss from Business (Sole Proprietorship). It is important to review the forms, ensure the amounts are correct, and determine any deductible expenses using your tax records when filing your return, as the Form 1099-K only reports gross payments. Another new FAQ addresses 1099-K donations received through crowdfunding.
As with all information returns and tax reporting obligations imposed on employers, it is crucial to understand the requirements for issuing Form 1099-K, including due dates and electronic filing obligations, to avoid penalties. While the 1099-K filing thresholds remain unchanged for 2023, there is no guarantee that this will also be the case for the 2024 filing season. Employers should be prepared to fulfill any obligations they may have under Code section 6050W to issue 1099-Ks at the lower threshold.
In conclusion, the recent updates to Form 1099-K and its accompanying guidance from the IRS aim to enhance tax transparency and compliance, particularly within the gig economy and online marketplace transactions. It is essential for businesses and individuals to stay informed about these changes and ensure they are meeting their tax reporting obligations to avoid potential penalties in the future.
