The anniversary of 9/11 always reminds us that our lives can be changed dramatically in one day–in an instant, in fact. We could not have imagined on September 10 that such tragedy would strike or that so many people’s lives would be changed. It’s one of the reasons it’s so helpful to us as a nation to carve out time to remember what happened.
Let’s remember to spread love and show courage wherever we can, this world needs both of those bad now and always, no doubt.
Now, in today’s note, we’d like to speak about a pretty major new tax law change that many people are concerned about.
- The lowering of the reporting requirement for payment networks (PayPal, Venmo, CashApp, etc.).
- Many more 1099-K’s will be issued in January of 2024 for people who have a “side hustle” or other business activity and are processing payments through credit or debit cards.
This will create a lot of confusion in January of 2024 and, for some people panic.
So, the purpose of today’s communication is to answer some questions about this new 1099-K tax law and how it might affect you or someone you know.
Knowledge is power and we want YOU to feel educated and empowered.
Will You Get a 1099-K This Year?
“Count the day won when, turning on its axis, this earth imposes no additional taxes.” – Franklin P. Adams
You’ve been hearing about the changes to the reporting threshold for 3rd party vendors like Venmo and PayPal for a while now. Thanks to the 2021’s American Rescue Plan, the reporting threshold dropped from $20,000 for 200 transactions to merely $600 dollars per year.
“Reporting threshold” means the level of payment someone has to receive wherein the payment processor must send that person (and the IRS) a 1099.
Like a lot of other people, you may use apps like Venmo and/or CashApp for personal reasons, like sending some quick cash to friends for a shared meal or receiving payment for grandma’s antique hutch you helped her sell on Facebook Marketplace.
So, you’re probably wondering if you’ll see a Form 1099-K in your mailbox this year for those types of “personal in nature” (not earned income) transactions.
It’s certainly possible that you could receive a Form 1099-K, but it’s not necessarily a sign that you owe the government for a non-business transaction.
Here’s what’s important to know: You might receive a 1099-K without owing any taxes on the reported income. In other words, just because you get a 1099-K does not automatically mean that the income is taxable.
Note, errors can occur and to be safe in having the most accurate information, if the amount stated on the form doesn’t match your transaction records, it’s your right to get it corrected. You’ll need to reach out to the vendor and keep a copy of the 1099-K they sent you for your records.
Let’s talk about some additional situations you might have questions about…
If you’re selling a personal item, like a car or a piece of furniture, generally this should not result in taxable income, and the IRS has provided tax professionals with a process to avoid tax on the sale of a personal item (even if you receive a 1099-K for that sale).
If you find yourself selling inherited items, you would typically need to report this income, but you can offset it by deducting the cost basis of the items from the sales proceeds.
If you’re getting reimbursed by friends for a meal out, this shouldn’t result in a 1099-K. Same if a family member lends you money or borrows from you or you cover them for an expense like a flight home. However, the reality is that there will inevitably be some errors with classifying transaction types on the part of the payment processor; sometimes, they won’t know it’s a personal or business transaction. If you receive a 1099-K for a mis-classified transaction, reach out and we’ll help you sort the issue out.
Payments to friends and family: Generally, if you receive money from friends or family for goods or services, you might get a Form 1099K. But unless you’re running a business, you typically don’t need to report this on your tax return.
Foreign payment networks: Interestingly, if you’re engaged with networks outside the United States, they are not required to send out Form 1099-Ks. However, if you are conducting business, you still need to report this income on your return.
Digital goods and services: The IRS requires payment networks to report transactions involving digital goods and services. The exact details on how to report this on your return are still a bit unclear, but we’ll be here to guide you through the process as soon as the IRS provides further guidance.
Non-commercial activities: If you are involved in non-commercial activities, such as crowdfunding or peer-to-peer lending, you might see a Form 1099-K. The guidelines on reporting this income are still pending from the IRS, but rest assured, we’ll keep you updated.
Now, if you are doing business through Etsy or receiving electronic payments for some kind of self-employment (side gig or otherwise), it’s essential to report these payments as business income, even if you don’t owe any taxes on it. The new reporting requirements are just a little additional step to ensure everything lines up right on your returns.
There will be many more situations that need clarification and tax insight. Remember, in this changing landscape, and you’re not alone.
Hopefully this is a good start towards answering some common questions and concerns about this new 1099-K law, and we will continue to keep on top of this issue so that you know you don’t need to stress, we have your back.
In your corner,
Pronto Income Tax Team
PS — REMINDER! Extension tax filing deadlines for 2022 tax returns are rapidly approaching!!!
Due to the heavy storms at start of 2023, California residents received automatic extensions until October 16th for both business and personal tax returns. On our side, this means that MANY more clients are on extension than usual.
We strongly advise you to schedule time with your chosen Pronto Tax Professional ASAP if you do need our help to beat the October 16 deadline and avoid costly penalties and interest: https://pronto4tax.com/contact/