Did you read the American Rescue Plan Act of 2021? The bill was a total of 628 pages, so Senate clerks may be among the only people who read it in its entirety. Chances are you missed some of the details — such as the Form 1099-K changes coming in 2022.
The bill defines new Form 1099-K usage for third-party payment platforms. It also lowers the reporting threshold for third-party settlement organizations (companies with contractual obligations to make third-party payments). These changes close a tax loophole, adding transparency and targeting under-reported income.
What’s behind the 1099-K changes
When businesses pay contractors using credit or debit cards, they don’t issue 1099-NEC forms for non-employee compensation. Historically, the paying business hasn’t been responsible for tracking contractors’ transaction counts. When it doesn’t issue a 1099-NEC, the federal government depends on third-party processors to send that contractor a 1099-K.
Payment settlement entities, such as PayPal or Venmo, only issue 1099-Ks to contractors with 200-plus transactions totaling over $20,000. Without a 1099-NEC or 1099-K, contractors may be less likely to report income. Most businesses currently don’t receive a Form 1099-K because they never meet the transaction minimum.
Beginning in 2022, the reporting threshold changes to $600 with no transaction minimum. The new $600 threshold applies both to independent contractors and payment settlement entities. There are major implications for contractors working in the gig economy. The change will also affect companies who make payments to their contractors through these platforms.
Contractors or gig workers will have to report income more accurately, driving the collection of billions in tax revenue. This will give the federal government a better understanding of the size of the gig economy. Receiving 1099-Ks will also make it easier for independent contractors and the self-employed to file for unemployment insurance.
According to Rice University’s Baker Institute for Public Policy, the change should raise $8.8 billion in tax revenue over the next ten years. They also note that while contractors’ reporting requirements have increased, their tax liability stays the same.
What the 1099-K changes mean to business owners
Ideally, your business has policies and controls for tax rules affecting revenue and expense reporting. If you sell goods or services, and complete transactions online, you may be experienced in using 1099-K forms. The new de minimis threshold means requiring a taxpayer identification number from individual contractors, as well as backup withholding. If contractors don’t provide their TIN, your company must withhold taxes from payments and report that withholding in your 1099-Ks.
Accurate accounting will help ensure that your company doesn’t over-or underpay tax. Your compliance will also keep the IRS from assessing penalties, which can run as high as $270 per 1099-K.
Non-compliance includes late filings, failure to report taxpayer-identification numbers and failure to provide contractors with their required reporting information. The IRS may impose excessive backup withholding obligations and larger penalties for poor controls and neglect.
The new rules take effect at midnight, December 31, 2021. This means it’s not too early to assess the way your company manages tax compliance.
To discuss how the cost-effective implementation of these new reporting requirements impacts your business, contact Tomika Bullet at Windham Brannon.
