How to prepare your business for the 1099-K changes

They’re bound to take effect eventually.

The 1099-K reporting threshold was scheduled to plummet from $20,000 and 200 transactions to $600 and any number of transactions for tax year 2022 — but in the final hour, the threshold changes were pushed back to tax year 2023. Now, in a stunning display of déjà vu, the threshold changes have again been delayed. According to an IRS announcement from November 21, 2023, the 1099-K reporting threshold will not drop to $600 for tax year 2023 after all.

Read on to learn:

What is a 1099 form?

An IRS 1099 form is a tax form that documents payments to a business, individual, or entity that isn’t an actual employee. The payer is responsible for filling out the appropriate 1099 form and sending copies to the payee, the IRS, and where required, the state taxing authority. 

There are different 1099 forms for different types of payments. The IRS currently lists 21 different 1099 forms, from the Form 1099-A (Acquisition or Abandonment of Secured Property), to the Form 1099-SB (Seller’s Investment in Life Insurance Contract). Most forms must be sent to all necessary parties by January 31 of each year.

The Form 1099-K reports non-W-2 income received during the year from one of two types of reportable payment transactions:

  1. Payment card transactions (credit, debit, or stored value cards such as a gift card) 

  2. Third-party network transactions (payment apps or online marketplaces, including third-party payment settlement organizations)

This includes payments for personal items sold, goods sold, services provided, or property rented through online marketplaces, auction sites, ticket exchange or resale sites, peer-to-peer payment platforms or digital wallets, and more. 

Form 1099-K has been in the headlines since the enactment of the American Rescue Plan Act of 2021, which significantly impacted its reporting requirements. Or will eventually.

What happened to the 1099-K under the American Rescue Plan?

The American Rescue Plan (ARP) dramatically lowered the 1099-K reporting threshold for third-party payment apps, also known as third-party settlement organizations (TPSO). 

Prior to the enactment of the ARP, online marketplaces, payment apps, and payment card companies were required to file a Form 1099-K with the IRS and provide a copy to any business, individual, or entity that earned over $20,000 in aggregate payments and 200 transactions in a calendar year. The ARP drastically cut that threshold to more than $600, period. 

The ARP called for the lower threshold to take effect for the 2022 tax year. However, on December 23, 2022, the IRS announced that the threshold would not drop to $600 for the 2022 tax year. Instead, the $600 threshold would apply to “transactions that occur after calendar year 2022.” Affected businesses breathed a sigh of relief and set about preparing to implement the new threshold for the 2023 tax year.

Then, on November 21, 2023, the IRS pushed back the threshold change for the second time. The agency announced they will treat 2023 as another transition year to “reduce the potential confusion caused by the distribution of an estimated 44 million Forms 1099-K sent to many taxpayers who wouldn’t expect one and may not have a tax obligation.”

Thus, for tax year 2023 as for previous years, a 1099-K form will not be required unless a taxpayer receives over $20,00 and has more than 200 transactions in 2023. The IRS now plans to phase in the lower threshold, instituting a threshold of $5,000 for tax year 2024. It has yet to provide a new effective date for the $600 threshold, but unless Congress passes a new law, the 1099-K threshold will likely drop to $600 eventually. 

Once it does, the impact will be huge.

Are businesses prepared for the 1099-K changes? Survey finds mixed results.

When the interim $5,000 threshold takes effect, millions of marketplace sellers, gig workers, and occasional sellers who have never seen a 1099-K will receive a 1099-K from a payment app like PayPal, Square, and Venmo or an online marketplace like Amazon, eBay, and Etsy. Millions more taxpayers will receive a 1099-K whenever the threshold drops to $600.

Are businesses ready for the 1099-K changes? To find out, Avalara commissioned Censuswide to survey gig workers, marketplace sellers, and decision makers at online marketplaces. The survey was conducted in late October 2023, when the $600 threshold was still imminent. 

Nearly 90% of the marketplaces surveyed said their sellers are prepared for the 1099 changes.

 

Are your sellers prepared for the 1099-K threshold change? 
Yes (net)90%
Yes, very prepared60%
Yes, somewhat prepared29%
No, not prepared8%
Not sure3%

 

Most of the polled marketplaces have taken steps to help their sellers with the new reporting requirements. Three-quarters (75%) of respondents have “informed and advised sellers,” and 59% have “informed sellers.”

 

What steps, if any, have you taken to help your sellers with the new reporting requirements? (Tick all that apply.) 
Informed and advised sellers75%
Informed sellers59%
No actions taken2%
Not sure2%

 

Yet while 87% of the online marketplace sellers and gig economy workers surveyed said they’re aware of the upcoming changes to IRS Form 1099-K reporting of digital payments, including the new income threshold of $600, just 51% of those surveyed say they’re “aware and prepared” for the upcoming changes. Another 19% are “aware but not prepared.”

 

Are you aware of and prepared for upcoming changes to IRS Form 1099-K reporting of digital payments, including the new income threshold of $500? 
Aware (net)87%
Aware but not prepared19%
Aware and prepared51%
Somewhat aware/prepared16%
Not aware or prepared12%
Not sure2%

 

Perhaps that’s why 78% of marketplace sellers and gig workers surveyed are concerned about the upcoming changes to the 1099-K reporting requirements. Of those, about 49% are “very concerned” and 29% are “somewhat concerned.”

Though marketplace facilitators have worked to educate their sellers about the upcoming 1099 form changes, the $600 threshold will likely take a toll. About 83% of the surveyed marketplaces anticipate sellers to drop from the platform as a result of the 1099-K compliance issues. For their part, 55% of marketplace sellers and gig economy workers surveyed said these new 1099-K rules will impact their decision to continue on-demand work or selling on marketplaces. 

Indeed, 64% of marketplace sellers and gig economy workers surveyed are considering alternatives to gig work/online selling as a result of the compliance requirements and tax implications of the new 1099-K rules. Another 16% said it’s “too early to determine.” Only about 21% of the surveyed marketplace sellers and gig economy workers said the upcoming changes will not impact their decision to continue on-demand work or marketplace selling.

 

Are you considering alternatives to gig work/online selling as the result of compliance requirements and tax implications of new 1099-K rules? 
Yes64%
No21%
Too early to determine16%

 

Whether feeling prepared or unprepared at this time, marketplace facilitators, marketplace sellers, gig workers, and other taxpayers who will be affected by the threshold change now have more time to put their ducks in the proverbial row. 

That’s a good thing, because the number of 1099-K forms submitted to the IRS is expected to jump from 14 million to 44 million once the threshold drops to $600.

How can companies get ready to send out all these 1099 forms?

Cloud-based automation solutions that scale with a business’s needs can help online marketplaces and third-party payment processors comply with the additional reporting requirements that will result from the lower 1099-K threshold. 

And indeed, a majority of online marketplaces (65%) surveyed by Censuswide plan to deliver 1099-Ks via a “1099 automated solution.” However, about 47% plan to send them out “manually, using internal teams,” and close to 42% plan on “outsourcing to a firm.” Respondents could select more than one answer and so may be planning to use more than one delivery method.

 

How do you plan to deliver 1099-Ks to all sellers that meet the new threshold in 2024? (Tick all that apply.) 
1099 automated solution65%
Manually, using internal teams47%
Outsourcing to a firm42%
Not sure5%
Other, please specify1%

 

Avalara 1099 & W-9 can help both businesses and accounting professionals streamline management of 1099-K forms. It allows you to store vendor and freelancer information, import 1099 payee data, and transfer vendor details for a quick turnaround, while automatically checking for errors. 

“Our survey reveals the need for proactive measures on the part of marketplace sellers, on-demand workers, and online marketplaces to determine how best to comply with a revised 1099-K digital payments threshold,” says Scott Peterson, VP of Government Relations at Avalara. He suggests affected businesses seek advice from a bookkeeper or a tax or accounting professional before making big decisions related to 1099 compliance.

 

Survey methodology

Marketplaces: The research was conducted by Censuswide, with 106 decision makers over the age 18 in online marketplaces (eBay, Etsy, Amazon, etc.) in the U.S. (job titles: Accountant, Bookkeeper, Vendor manager, Controller) between 10.20.2023 – 11.1.2023. Censuswide abides by and employes members of the Market Research Society, which is based on the ESOMAR principles.

Marketplace sellers and gig economy workers: The research was conducted by Censuswide, with 501 sellers on online marketplaces and gig economy workers (freelancers, contractors, side hustles, etc.) in the U.S. The research was run between 10.20.2023 –11.1.2023. Censuswide abides by and employes members of the Market Research Society, which is based on the ESOMAR principles.

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