The rules for the upcoming tax filing season have already been amended. On December 23, 2022, the IRS responded to the industry by postponing its new rules regarding 1099-Ks for one year.
The IRS listened to the concerns regarding the existing backlog, the need for clear guidance, and taxpayer confusion. The thresholds of$20,000 and 200 transactions remain in place for reporting season 2023 and will not become effective until 2024.
The critical points of this blog are:
- The change in the rule does not affect the requirements of income reporting.
- The change regards only the issuance of 1099-Ks by third-party networks.
- The change to the thresholds to which the third-party networks must abide will come into effect during the 2024 reporting year.
The Effect Upon Taxpayers
The rule change means the status quo for one additional year. Small business owners and freelancers who receive payments from a third-party network, like PayPal or Venmo, will be issued a 1099-K only if the number of transactions exceeds 200 and the income exceeds $20,000.
The concern from the industry was the personal expenses and reimbursements made through these networks. If these personal expenses and reimbursements were not specifically designated as “personal”, then the amounts would be reported as taxable income. Even if the taxpayer made the adjustment and correctly reported the income amount on Schedule C, the mismatch in the reported income and the issued 1099-K would trigger an IRS tax notice of adjustment and penalty.
The results of this confusion would cause undue aggravation for both the taxpayer and the IRS.
This one-year postponement will familiarize taxpayers with the rule and process to correctly identify personal and business expenses.
This is good news for 1040 filers as small business owners and freelancers typically come under the $20,000 and the 200 transaction thresholds.
The 1040 for 2022
The rule change enacted by Congress in March 2021 would have required third-party payment networks to provide 1099-Ks to the IRS and taxpayers for payments exceeding $600, regardless of the number of transactions.
This one-year delay can be considered a transition year. The $600 threshold is in effect for calendar year 2023.The rollback to the pre-March 2021 limits remained in place for calendar year 2022 only.
Taxpayers need to know that the rule change, the rollback, and the updated rule now in effect only changed the thresholds and not any other requirement or instruction relative to the 1099-K nor to the taxability of the income.
The Recognized Concerns
The IRS’s postponement is directly related to the serious concerns of the taxpaying public and the burdens placed upon the third-party networks to comply. There was public confusion regarding how to report payments and the proper inputting of personal and business expenses.
The transition year of 2022 enabled the networks to gear up for the reporting burden. As for the taxpayers, look for clear guidance regarding compliance and the proper method to tag business expenses.
Freelancers and small business owners who receive income and pay expenses through third-party networks must be careful to properly designate their expense categories. The transition year expired on December 31, 2022, and the $600 threshold is now in place.
The careful and thoughtful attention to make certain that expenses are properly classified before the transaction is finalized will save time and frustration in getting the mistake corrected and dealing with the IRS when it believes it is owed more taxes.
Seeking Professional Guidance and Advice for the Upcoming Tax Season? Contact Anderson Bradshaw Tax Consulting Today
The tax professionals and consultants at Anderson Bradshaw Tax Consulting can help with any tax situation. With over 30 years of experience in the industry, we have seen almost every tax issue and have learned the best ways to handle each situation. You can feel confident knowing your struggles and difficulties with the IRS can be resolved and corrected quickly and efficiently at Anderson Bradshaw.
For further information or to schedule a consultation, please contact Anderson Bradshaw Tax at 877.550.3911 or visit www.AndersonBradshawTax.com to learn more.
