If you are a freelancer or self-employed “gig worker,” you will likely need to file a 1099-K when filing your taxes this year.

When President Joe Biden signed the American Rescue Plan Act (ARPA) into law on March 11, 2021, it came with some changes and clarifications for the 1099-K form. The changes mainly revolve around reporting for third-party payment networks.

There was also a change to the de minimis reporting standard for third-party settlement organizations that will go into effect for returns filed for 2022.

Essentially, if you use PayPal, Etsy, eBay, or any electronic payment processing platform to collect money from buyers in excess of $600, you will have to pay attention to these changes.

Let’s go into these changes in some more detail now.

Clarification of 1099-K Third Party Reporting

The new law clarifies the scope of reporting for third-party networks for the 1099-K form. It clarifies that 10-99K reporting for third-party payment networks, like PayPal and Stripe, is intended for transactions for goods or services only.

This comes after questions have been raised in recent years about whether 1099-K reporting for third-party networks must involve transactions other than goods or services.

Some of the language in the definition of third-party payment networks led to confusion about whether payments for rent, royalties, or other transactions on third-party payment networks needed to be reported or not.

The law clarifies that such payments are still reportable with Form 1099-MISC (Miscellaneous Information). Only transactions for goods and services that have been settled via a third-party network transaction can be reported on Form 1099-K.

The new law means that not only are workers required to claim their income on their taxes (which is currently required), but any business that pays them like Upwork, Uber, DoorDash, and even marketplaces like Etsy, must submit a 1099-K to the IRS on behalf of the individual.

De Minimis Threshold Changes

ARPA changes the de minimis threshold for Form 1099-K reporting for third-party payment networks— keep in mind, there is no de minimis threshold for payment card transactions.

Currently, the de minimis rule requires third-party payment networks to use Form 1099-K to report:

•   Transactions with any payee only if the amount that would otherwise be reported is more than $20,000

•   The aggregate number of transactions is more than 20.

The new law replaces the two-step de minimis standard with a single $600 reporting threshold that will go into effect for the 2022 tax season.

Accordingly, a single transaction that exceeds $600 that is settled with a third-party payment network will now be reportable. So will multiple transactions that exceed $600.

This change is expected to significantly increase the number of 10-99K forms filed for 2022.

House Democrats are touting the tightening of the requirements as a way to crack down on tax cheaters. They believe the change will generate approximately $8.4 billion over ten years.

This tightening of the reporting requirements will mean a lot more paperwork and tax compliance requirements are in the future of third-party payment networks. It also means tax season will be a lot more taxing on anyone who uses the platforms to earn money. The good news is, you’ve got two years to prepare. To ensure all reporting is accurate and to make the most out of your deductions, contact  our office today for professional tax advisory.