Form 1099-K Reporting Essentials for Tax Pros

The American Rescue Plan basically expands Form 1099-K reporting threshold for third-party settlement organizations to focus on $600 in value of transactions annually without regard to the number of transactions. 

The old rule, which still the rule in 2020 and 2021, focuses on a $20,000 minimum with an added limitation of finding 200 transactions per payee (Sec.  6050W(e’)). The existing rules regarding payment card transactions – debit, credit or stored-value cards – did not change.

For perspective, we note an IRS site of existing law briefly summarizing the scope of 1099-K. This IRS.gov site, “Understanding Your 1099-K,” summarizes by saying the provisions reach payments from:

• “…. payment card transactions (e.g., debit, credit or stored-value cards), and/or
• in settlement of third-party payment network transactions above the minimum reporting thresholds of gross payments that exceed $20,000 and more than 200 such transactions.” 

The site also discusses such practical topics as steps to consider when you receive the statement in error. It also explains, “The minimum reporting thresholds of greater than $20,000 and more than 200 transactions apply only to payments settled through a third-party network; there is no threshold for payment card transactions.”    

The IRS mentions problem areas such as cut-off problems when the 1099-K may include transactions after the date of sale of a business.  The following IRS site, though dated, may also be useful in resolving problems: “General FAQs on Payment Card and Third Party Network Transactions,” IRS.gov. 

Keeping in mind the rules remain in 2020 and 2021, we note the 2020 instructions to Form 1099-K begin their explanation of the scope of the form, confirming that it reaches payments received from payment cards and through a third-party network. 

“Merchant acquirers and third party settlement organizations, as payment settlement entities (PSEs), must report the proceeds of payment card and third party network transactions…” 

Section 6050W speaks in terms of reaching each “payment settlement entity” meaning in the case of a payment card transaction, the merchant acquiring entity, or in the case of a third-party network transaction, the third party settlement organization. The “merchant acquiring entity” is defined as the “bank or other organization which has the contractual obligations to make payment to participating payees in settlement of payment card transactions.”   

A “third part settlement organization,” which is the focus of the revision, is defined in the statute as “the central organization which has the contractual obligation to make payment to participating payees of third party network transactions.” Questions have at times been raised as to whether Form 1099-K reporting for third party networks involves transactions other than goods or services.

Another amendment with the American Rescue Plan is clarification that Form 1099-K reporting for third party payment networks is intended to apply only to transactions for goods or services. Payments for rents and royalties, not being payments for goods and services, are generally reportable on Form 1099-MISC, not on Form 1099-K. This amendment is effective on the date of enactment, March 11, 2021. 

The expanded scope of reporting third party payment network transactions, effective post-2021, is intended to report income earned by independent contractors. Companies like eBay and Amazon will likely be significantly affected in their compliance reporting to the IRS.

In general, businesses may want to review their procedures for obtaining taxpayer identification numbers.  Some businesses may have focused on dollar thresholds and old procedures that may be inadequate after 2021.

Consumers don’t receive 1099-K’s, but many business owners will be getting more of such forms. As a practical matter, considering vendors cannot always distinguish between personal and business payments, it is generally good not to accept payments for personal expenses on the same accounts used for business purposes.

Also keep in mind that state reporting issues don’t necessarily conform to the federal rules. State tax conformity, if it is coming, may also be delayed in some cases.  We would generally anticipate any state tax conformity as to the primary amendment of Section 6050W would be in place by the time the expanded federal rule is in place after 2021.