October 30, 2023

Deferred expansion of 1099K reporting for electronic payments like Venmo or Zelle

The use of third-party settlement organizations (TPSO’s) – like Venmo and Zelle – is ubiquitous. These days, it’s common to use these services for such things as paying a coworker for lunch, paying a babysitter, or reimbursing a friend for those hard-to-get Taylor Swift concert tickets. Most people simply don’t write checks or carry cash anymore. At the same time, businesses are increasingly using TPSOs as methods of cash collection. This presents a major challenge for business tax compliance.  

If you are among the many users of TPSOs, whether for personal or business purposes, you need to be aware of significant reporting changes for tax year 2023 resulting from the American Rescue Plan Act of 2021 (ARP).  

What’s changing 

The new reporting threshold for business transactions using TPSOs is $600 per year in aggregate payments, beginning January 1, 2023. Previously, the threshold was more than 200 transactions per year exceeding an aggregate amount of $20,000. 

This means a TPSO is now required to report third-party network transactions paid in 2023 to any participating payee that exceed the minimum threshold of $600 in aggregate, regardless of the number of transactions. TPSOs must report these transactions by sending the individual payee an IRS Form 1099-K on or before January 31, 2024. 

Reasons and ramifications  

This is a major change that will have far-reaching ramifications, given the increasingly common nature of these types of payments.  

The focus of the law is on individuals and companies using these platforms to conduct business transactions, and the reason is simple: tax compliance is higher when amounts are subject to information reporting, like Form 1099-K.  

The new law is intended to increase compliance for businesses using TPSOs, not to go after personal transactions and activities, such as paying coworkers back for lunch, paying your roommate your half of the internet bill, or paying your friend back for an Uber ride.  

Intended to take effect for tax year 2022, the IRS delayed the implementation of the $600 reporting threshold for a year to allow a more orderly transition for TPSO tax compliance as well as individual payee compliance with income tax reporting.   

What to know going forward 

This year, there is a significantly lower threshold of $600 in aggregate for third-party network transactions. Because of this, we expect many taxpayers will receive Form 1099-K for the first time in January 2024. In most cases it will be justifiable if the amounts gathered were from business transactions. However, we also expect there will be taxpayers that receive Form 1099-K in error.   

If you use Venmo, Zelle or other TPSOs, don’t be surprised if you receive Form 1099-K in calendar year 2024. More importantly, be prepared to consult with your CPA so they can help you understand the tax requirements and ramifications of this new law for your specific situation.  

 

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