Earn Side Income? Know This New Tax Rule

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Earn Side Income? Know This New Tax Rule

The Internal Revenue Service (IRS) has issued a new regulation that affects how third-party network transactions are reported on Form 1099-K for self-employment revenue collected in 2022 and beyond.

Form 1099-K is used to report payments made to you by payment settlement companies (PSEs) that handle payment card or third-party network transactions. Payment cards comprised debit cards, credit cards, and prepaid credit cards. Venmo, PayPal, and Zelle are all examples of third-party network transactions.

Previously, regardless of the amount or number of transactions, you got Form 1099-Ks from all payment card issuers. You also got a Form 1099-K from any third-party network where you had over 200 transactions and over $20,000 in gross payments.

Any 1099-Ks you get in January 2022 for income generated in 2021 will be subject to the previous regulations, which include the $20,000 limitation.

The number-of-transactions barrier (200) is deleted totally beginning with tax year 2022, and the $20,000 gross-payments level is decreased to $600 for third-party network transactions. Payment card transaction regulations remain unchanged. All PSEs that handle credit card, debit card, or prepaid credit card payments on your behalf, as well as any PSE that processes more than $600 in third party network transactions, shall provide you a 1099-K.

Key Takeaways

  • If you work for yourself, even if just part-time, including as a gig worker, you must comply with unique IRS tax filing rules for self-employment income.
  • For revenue generated in 2022 and submitted with taxes in 2023, Form 1099-K, which covers payment card and third-party network transaction income, has a new reporting and filing requirement.
  • If you get any payment card revenue AND/OR a total of more than $20,000 AND more than 200 transactions from any third party network in 2021, you will receive a 1099-K.
  • In 2022, you will get a 1099-K for any payment card revenue AND/OR any third-party network income over $600.
  • There is no minimum number of transactions as of 2022.
  Kiddie Tax Definition

1099-K Rules for Income Earned in 2021

You should get a Form 1099-K for tax year 2021 from any payment settlement organization that processes:

  • Any payment card transaction (credit, debit, or prepaid credit card) that does not meet the threshold
  • Third-party network transactions, if the firm handles more than $20,000 and has more than 200 transactions.

Any reportable payment’s gross amount is as of the transaction date and does not include any modifications for credits, cash equivalents, discounts, fees, refunds, or other sums.

For income generated in 2021, you should get your Form 1099-K (s) by January 31, 2022—and for income earned in 2022, you should receive it by January 31, 2023.

1099-K Rules for Income Earned in 2022

You should get a Form 1099-K from each payment settlement business that handles the following payments in tax year 2022:

  • Any payment card transactions with no threshold, as indicated above
  • Third-party network transactions over $600 with no transaction threshold

Any reportable payment’s gross amount is as of the transaction date and does not include any modifications for credits, cash equivalents, discounts, fees, refunds, or other sums.

Reporting 1099-K Income

If you are self-employed, include your 1099-K payments in your gross revenues on Schedule C. Schedule E or F is used instead, depending on your filing status. Ascertain that the amount stated on your 1099-K appropriately represents payments received for your firm.

Personal gifts, charity donations, and reimbursements, for example, are explicitly exempt from Form 1099-K reporting. Personal transactions, on the other hand, may be included in Form 1099-K reporting if the receiver gets money via their company account.

  Induced Taxes Definition

Other nonreportable transactions include:

  • Withdrawal of monies from an ATM using a payment card, or cash advance or loan against the cardholder’s account.
  • A check that is issued in conjunction with a payment card and accepted by a merchant or other payee.
  • Any transaction in which a payment card is accepted as payment by a merchant or other payee associated to the payment card’s issuer.

Remember that the amounts reported on 1099-K, like those reported on 1099-MISC or the new 1099-NEC, are gross revenues and do not include any deductions or expenditures. These are listed elsewhere in Schedule C.

The American Rescue Plan Act and Form 1099-K

The American Rescue Plan Act (ARPA) mandates changes to 1099-K requirements for tax year 2022, which also states that third party network reporting on Form 1099-K is meant to apply solely to transactions for goods and services.

Since the initial use of Form 1099-K in 2012, there has been some uncertainty over whether third-party network reporting included transactions other than goods and services. This misunderstanding developed because the definition of a third-party network transaction includes “any transaction settled by a third-party payment network.”

ARPA specifies that payments for royalties, rentals, and other forms of transactions resolved via a third-party payment network must be reported on Form 1099-MISC, whereas only transactions for goods and services must be reported on Form 1099-K.

ARPA will result in a large rise in the quantity of Form 1099-Ks that PSEs must submit each year. If you receive payments handled via third-party networks, you should closely monitor such payments as well as the total amount received from each PSE to ensure that you obtain a 1099-K, if applicable. If this is not the case, contact the third-party network or PSE to rectify the problem.

  Understanding Tax Brackets, With Examples and Their Pros and Cons

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