Prepare your accounting practice for new 1099 rules
Forms 1099 are changing — eventually. On November 21, 2023, the IRS announced that they are again delaying the $600 1099-K threshold, which was set to start with tax year 2023. When this change eventually does take effect, payment platforms like Venmo and PayPal will be required to send 1099-K forms when transactions for an individual or a business exceed $600 in a calendar year.
This is the second time the threshold change has been postponed. In December 2022, the IRS announced that they were pushing the change from tax year 2022 to tax year 2023. But even the extra time wasn’t enough for taxpayers to prepare for the change, and no wonder — the IRS would have sent out an estimated 44 million Forms 1099-K to taxpayers who may not have been expecting one and may not have a tax obligation. Faced with those numbers, it’s not surprising that the IRS moved the goal post.
Whenever the change actually takes place, accounting firms should be prepared. With the new reporting threshold, more individuals will be receiving tax forms and looking to their accounting teams for help can take advantage of the change to 1099 laws as an opportunity to provide expertise to your clients — and be their hero during tax season.
New 1099 rules
Those who have done freelance work or made money through a side hustle will be familiar with the IRS 1099-K Payment Card and Third Party Network Transactions form. This form is specifically for payments received via a third-party network, like Venmo, PayPal, or Cash App, or credit or debit card transactions. Until recently, earners only received this form if they made $20,000 and had more than 200 transactions in a year. But in 2021, legislation passed that reduced the threshold to $600 regardless of how many individual transactions were recorded.
Now, the IRS is planning for a threshold of $5,000 for tax year 2024 and will phase-in the $600 reporting threshold enacted under the American Rescue Plan (ARP).
The reason for this change? The government is hoping to capture more taxable income from small business owners and gig workers who had previously flown under the tax reporting radar or weren’t aware of their filing requirements. (Note: Every individual or business is required to report all taxable income, but not all were receiving the forms in the mail to do so.)
Businesses and individual taxpayers reporting this type of income may have different requirements for state and federal taxes (especially in states that don’t have state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming). Plus, some states have combined federal and state filing for the 1099 series of forms.
More 1099 tax forms will complicate compliance
There are countless ways to earn money and, looking at the list of 1099 forms, countless ways to tax it. Once they take effect, the changes to the 1099 requirements could create millions of additional forms that businesses must send out, file, and keep track of. This will be an enormous burden on the IRS and businesses, and your clients will likely turn to their tax professionals for help.
1099 tax form troubles make businesses turn to accountants
Your clients already trust you with their 1040s and W-2s, so they’ll likely bring their new 1099s to you once the new threshold takes effect (along with many questions about them). If you’re prepared, the form change can create an opportunity for your firm to expand your offerings or boost existing services.
Streamline 1099 services for your accounting firm with technology
The right technology could help make the 1099 processes more efficient. An automated solution can help you collect, file, and manage the new forms, as well as save time while also reducing the risk of noncompliance.
Avalara 1099 & W-9 is a powerful tax automation solution that makes it easier to collect, manage, and e-file IRS forms — 1099s, W-9s, W-8s, and more. It allows you to store vendor and freelancer information (while performing real-time taxpayer identification number matching with the IRS), import 1099 payee data, and transfer vendor details for quick turnaround — while automatically checking for errors. If you’re looking to be a hero to your clients next tax year (and all year round), Avalara 1099 & W-9 can help you get there — no capes required.
This post has been updated to reflect the delayed threshold change.
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