Tax day is approaching. And while filing taxes may seem daunting and complicated to some, things get even more complicated for freelancers and small business owners who have to file 1099-K forms. There is a possibility. In fact, regulations regarding forms have not only changed many times, but also experienced delays, creating potential uncertainty regarding their requirements.
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“For small business owners and freelancers grappling with 1099-K filings, understanding the nuances of this process is paramount,” said Brian Gerson, co-founder and president of Clarify Capital. “First, determine if you qualify. Additionally, you should keep close records of your income verification and expense deductions, and be familiar with your allowable business-related deductions.”
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What is a 1099-K form?
Form 1099-K is designed to provide tax reporting for payments from third parties (such as payment apps and online marketplaces) for business transactions, according to Wolters Kluwer’s North American Tax and Accounting Division. Mark Luscombe, lead analyst, explained.
This applies to third-party payment processors such as PayPal, Stripe, and Venmo. “Years of IRS research has shown that third-party reporting improves tax compliance,” Luscombe added.
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What is the threshold?
This is one of the requirements that causes a lot of confusion.
For several years, there has been a requirement to report Form 1099-K transactions totaling more than $20,000 or more than 200 transactions per year.
Luscombe said Congress changed that requirement to require reporting of transactions totaling more than $600 starting in 2022. However, it is estimated that this could result in more than 30 million 1099-Ks being filed, so to help third-party processors prepare for this increased reporting, the Internal Revenue Service (IRS) ) first deferred additional filing requirements. 2022, and he’s on to 2023.
“Currently, even in the 2023 tax year, a 1099-K is only required for transactions totaling more than $20,000. […] Or 200 in number. “For the 2024 tax year, the threshold will drop to $5,000 for him, and thereafter the threshold will drop to $600 for him,” he explained.
The IRS itself acknowledged that it was reverting to old rules and delaying new requirements “to avoid confusion for taxpayers.”
“Given the complexity of the new provisions, the large number of individual taxpayers affected, and the need for stakeholders to obtain certainty with sufficient lead time, the IRS will “We plan to establish a $5,000 tax year threshold and implement the $600 reporting threshold established under the American Rescue Plan (ARP),” the IRS said in a November 2023 statement. Stated.
So how does this impact taxpayers?
Once the reporting standard changes go into effect, small business owners who receive payments through platforms like Paypal, Venmo, and Stripe will need to adjust their tax reporting accordingly.
“Lower thresholds mean more small business owners will receive 1099-K forms, and small business owners will be more diligent in tracking their transactions to ensure accurate reporting. Ben Richmond, U.S. country manager and CPA at Xero, said.
However, Mr Richmond pointed out that while that would not mean paying more taxes, it would encourage a more careful review of income and expenditure.
Peter C. Earle, senior economist at the American Institute for Economic Research, also said that the new dollar requirement “will reduce the filing threshold by nearly 97% and reduce the number of U.S. taxpayers required to file, especially freelancers and taxpayers.” “The number will increase significantly,” he said. Independent contractors, gig workers, and commercial hobbyists.
“Kids mowing their lawns in the summer, retirees selling crafts on Etsy, casual booksellers on eBay, and countless others are likely to trigger that filing obligation from now on.” he added.
Additional factors to note
Another important factor to keep in mind, experts say, is that in addition to federal requirements, state-specific rules vary from state to state, so taxpayers need to stay up to date with the latest regulations. is.
“Some states, such as Maryland and Massachusetts, have already adopted the $600 threshold in 2023, so freelancers should be aware of their state’s reporting requirements,” according to United Tax AI. President Matthew Stratman said.
According to TurboTax, the threshold for requiring a 1099-K in 2023 is $600 in Vermont, Virginia, and the District of Columbia. North Carolina and Montana also have $600 thresholds, but state tax officials have said those states may receive relief, he added.
Finally, an increase in 1099-K reporting by third-party payment processors could confuse small business taxpayers, Luscombe said.
“Because third-party payment processors may not know whether a particular transaction is a business or personal transaction, taxpayers may receive a 1099-K for non-taxable personal transactions. , which results in the need to account for that fact when filing a tax return,” he explained.
Small businesses, on the other hand, may receive multiple 1099s for the same transaction. This means that you will receive a 1099-K from a third-party payment processor and, in some cases, a 1099-NEC or even a 1099 from an independent contractor with whom your small business has done business. -MISC from other trades, he said.
“Small businesses should therefore carefully track their 1099s to avoid overpaying taxes, as two 1099s may relate to the same transaction,” he added.
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This article originally appeared on GOBankingRates.com: 4 things small business owners and freelancers need to know when filing a 1099-K
