1099 K requirements have changed in 2021, thanks to updates to the American Rescue Plan Act. Starting from 2022, if you’re a payment company, or you issue payments for any kind of goods and services – you’re likely to have new reporting obligations.
Don’t wait until 2022 to learn what’s expected of you, or you’ll end up playing catch up, with looming deadlines causing unnecessary pressure. Ready to get ahead of the game? Here’s the scoop.
This article is part of our guide on independent contractor taxes.
1099 K Requirements: 2021 and beforehand
The new legislation for payment providers is actually an update to existing regulations in the Internal Revenue Code.
Since the rules were first rolled out in 2011, it’s always been the case that all payment companies or anyone who makes third-party transactions to sellers of goods or services (known as Third-Party Settlement Organizations) were obligated to report these transactions to the IRS and submit the IRS form 1099-K for each financial year.
However, if this is the first you’re hearing about it, that’s because it was never that relevant for most organizations until now. Before 2021, the threshold for reporting and filing a 1099 K was $20,000 per freelancer as well as >200 transactions. 200 transactions a year is a payment every 1.8 days!
In practice, very few (if any) freelancers were going to be meeting these thresholds, and especially not via a single payment provider such as Bill.com, PayPal, or Venmo, or with the use of a single freelancer marketplace like Fiver or Upwork. This meant that very few organizations needed to report anything at all.
Changes to 1099 K Requirements in 2021
However, earlier this year, changes were made to the Internal Revenue Code which is set to impact basically every third-party settlement organization, and add a whole lot more paperwork to the average reporting cycle.
Third-Party Settlement Organizations now need to report for any goods and services transactions that exceed $600 in any financial year. There is no requirement for a minimum number of transactions. That means that if a freelancer gets paid via PayPal for a video editing project and charges $579, and that’s the only payment made to them for goods and services in the year, PayPal does not have to submit a 1099 K form for this individual.
However, if they throw in a $25 social media clip to go alongside the video – even if it’s part of the same single transaction, PayPal is now required to report their earnings to the IRS using the 1099 K form.
The main reasoning for this change is so that the IRS can keep better visibility over the payments that are being made to individuals, especially in a thriving gig economy. The IRS has reported that the self-employed tax gap is $69 billion, and “when income is not reported to the IRS, taxpayers are more likely to be non-compliant.”
By implementing legislation that means a great deal more gig workers will have their income reported from a third-party, which will force them to report all their income in their 1099 NEC form. The IRS is hoping to bridge the tax gap and encourage more independent freelancers to file accurate reports, especially as the gig economy continues to grow.
Who is Considered a Third-Party Settlement Organization (TPSO)?
The IRS defines a TPSO as “a central organization that has the contractual obligation to make payments to participating payees (generally, a merchant) in a third-party payment network.” If that needs some translation, these are usually intermediaries between a buyer and a seller, who either offer payment services exclusively (think PayPal, Bill.com, CashApp, etc), or who fulfill payment as part of their services by collecting funds from a buyer and delivering them to the seller, (consider freelance marketplaces like Fiverr and Upwork, or auction marketplaces like Etsy or eBay who take or hold payments themselves).
If you’re not sure if you fall under this category, here are some defining characteristics of a TPSO:
- The individuals who provide goods and services have established accounts with your business.
- There is an agreement that your organization will settle transactions for those buying and selling goods or services.
- You have processes, technologies or standards and terms around how transactions will be settled (for example, a timeline for payment, or a set fee that you take for completing the transaction.)
Important Dates for the Diary: When Do I Need to Submit Form 1099 K?
Don’t worry – you’re not behind on anything yet! The new rules go into effect from January 1st 2022, so any payments settled before this date are covered by the old threshold. However, from this date, you’ll need to create processes for tracking and monitoring the earnings of freelancers, gig workers, and agencies who sell goods and services using your business.
In practice, this means you’ll need to make sure that you have the right Taxpayer Identification Number (TIN) for each user, which ideally would be collected during the onboarding process.
By making sure you have this information at the earliest stages, you can avoid knowledge gaps that could slow down your reporting processes and might even trigger backup withholding obligations if you miss the deadline for reporting. For example, if you have asked independent contractors for a Form W8/9, their TIN should be included here for your reference.
As a TSPO, you’ll need to think about three copies of form 1099 K. One will be sent to the seller of the goods or services, one will go to the IRS, and one will be for your own records. It’s important to send a copy to the seller or merchant, as this helps them to balance their own invoicing and ensure that they are reporting the same amount of income on their individual tax returns as the TSPO has declared.
The IRS will use the report from the TSPO to compare and validate how much income individuals are declaring on their own tax returns.In terms of timeline, you’ll want to file the form after the end of the calendar year, so from January 2023, once you have complete records. Mark these dates on your calendar: The deadline for filing 2022’s Form 1099 K with the IRS is February 28th, with an extension for e-filing to April 1st.
What does the future holds?
Similarly to employee misclassification legalization and penalties, you should expect additional countries to follow.
After all, the freelance economy is booming and tax authorities want to ensure they are adjusting their tax filing rules to the new workforce. The UK tax authority (HMRC) has already reporting expected changes to their off-payroll working rules that should be published in late 2022.