In early 2023, more users of online marketplaces and mobile applications – such as payment apps, task apps, and ride-sharing apps – will receive Form 1099-K, "Payment Card and Third Party Network Transactions," for payments made in 2022. The previously high Form 1099-K reporting threshold in effect for payments made before 2022 has been replaced with a much lower $600 threshold for payments made in 2022. As a result, many providers of goods and services that use online marketplaces and mobile applications will receive a Form 1099-K for the first time in 2023.
More online marketplaces and apps subject to Form 1099-K reporting
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How this happened
IRC Section 6050W was enacted in 2008 to provide the IRS with information about payment card and third-party network transactions. A third-party network transaction is a transaction that is settled through a third-party payment network. Generally, a third-party payment network is an arrangement between a centralized organization, called a third-party settlement organization (TPSO), and unrelated providers of goods and services in which the TPSO settles transactions between the provider and its customers and guarantees payment to the provider. A TPSO is required to file Form 1099-K by Feb. 28 (March 31 if filing electronically) and furnish a copy to the payee by Jan. 31 of the calendar year following the year of payment. Form 1099-K reporting first was effective for payments made in 2011.
Originally, the threshold for Form 1099-K reporting was quite high. TPSOs had to report payments for a calendar year only if during the calendar year the payee received more than $20,000 and there were more than 200 transactions with that payee. As a result, many payments made by a TPSO were not subject to Form 1099-K reporting.
The Infrastructure Investment and Jobs Act significantly lowered the Form 1099-K reporting threshold. Beginning with Form 1099-Ks required to be filed and furnished in 2023 with respect to payments made in 2022, the threshold is triggered if the TPSO pays a provider of goods or services more than $600 during the calendar year. Payments meeting this dollar threshold are subject to reporting regardless of the number of transactions.
Preparing for 2023 Form 1099-K reporting
TPSOs that previously were subject to Form 1099-K reporting should review their processes to account for the new lower threshold. Changes to filers’ current reporting processes also might be necessary for identifying accounts subject to reporting and procedures for preparing, filing, and furnishing Form 1099-Ks. For instance, filers that previously filed paper Forms 1099-K now might be required to file electronically if, as a result of the lower reporting threshold, 250 or more Form 1099-Ks will be required.
Payers that are TPSOs that previously were not required to file Form 1099-K because they did not make payments subject to the higher threshold should take steps in 2022 to comply with this new reporting obligation. Steps to take include identifying accounts subject to reporting, ensuring that account names and taxpayer identification numbers are correct, establishing backup withholding procedures, and determining how Form 1099-Ks will be prepared, filed, and furnished. Significant penalties and liability for tax might apply for failure to comply with Form 1099-K reporting requirements.
Many payees that never previously received Form 1099-Ks should prepare for the receipt of these new forms. Unlike Form 1099-MISC, “Miscellaneous Information,” and Form 1099-NEC, “Nonemployee Compensation,” which report income, Form 1099-K reports gross payments without reductions for credits, discounts, fees, or refunds. As a result, the amount reported to the payee on a Form 1099-K likely will be higher than the payee’s gross receipts. Maintaining good books and records, even for the casual or occasional provider of goods or services, will be important for responding to an IRS or state tax authority inquiry about differences between what is reported on Form 1099-K and what is reported on the payee’s return.
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