The American Rescue Plan of 2021 changed how payment card and third-party network transaction payments are reported. With this change, taxpayers who receive business income through online platforms, payment apps, or payment card processors will now receive a 1099-K tax form when they receive payments totaling more than $600 per year.
The IRS delayed the start of this policy in 2022, but the rule applies to income received during the 2023 tax year. However, some lawmakers hope to change this tax rule because they feel the threshold is confusing and could result in errors being made, making tax season unnecessarily complex for business owners. Find out what you need to know.
The American Rescue Plan of 2021 changed payment reporting thresholds
As part of the American Rescue Plan of 2021, the payment threshold for third-party payment settlement organizations was reduced. This change impacts taxpayers who receive business income through online payment platforms, payment apps, and payment card processors — whether through a side hustle, freelance work, or a small business.
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Previously, taxpayers received a 1099-K form when they had more than 200 payment transactions per year, exceeding an aggregated amount of $20,000.
But due to law changes, taxpayers receiving business income through payment apps like Venmo or PayPal totaling more than $600 per year will receive a 1099-K tax form. This reporting change will impact the bank accounts of many Americans.
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This applies to income earned during the 2023 tax year. These tax forms are sent by the payment processing companies to the IRS and taxpayers. It’s worth noting that this change doesn’t impact personal transactions made through payment apps, like splitting dinner with a friend or sending a family member money for their birthday.
But it affects the many Americans who bring in business income. This recent change could lead to double income reporting, which could cause errors and unnecessary stress during tax season. It could also result in non-business-owner taxpayers mistakenly receiving a tax form.
Lawmakers want to repeal the new reporting threshold
Some lawmakers hope to repeal these changes to minimize confusion and reduce reporting errors. There is bipartisan support for the reporting threshold to be adjusted.
One such legislation that was introduced into Congress is the Small Business Jobs Act, which aims to repeal the current law and restore the previous higher reporting threshold.
Only time will tell if this bill or similar legislation will pass. But if there are no such legislation changes soon, taxpayers should be aware of the latest reporting thresholds so they’re prepared come tax time.
It pays to keep careful records of business income
Any business income you receive is taxable. Just because you don’t receive a tax form stating that you received payment doesn’t mean you can avoid paying taxes on your business earnings. Don’t wait until April to review your earnings for the year.
If you’re a small business owner, freelancer, or gig worker, keeping accurate records of your income and expenses is a must. Keeping careful records can make tax season less stressful.
Being organized can also help if reporting errors occur in the future because you’ll have the information you need to prove your income to the IRS. Plus, you’ll have a better idea of where your personal finances stand, which is a win for your personal and professional life.
Tax time looks different for self-employed workers. If you’re confused about how your tax situation may change due to a side hustle or freelance work, it’s best to contact an accountant for help to avoid making costly errors. An expert can guide you through the changes.
You might also consider using tax software to prepare and file your tax returns. Check out our list of the top small business tax software to learn more about how software can help you.
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