Whether you were totally ready to implement 1099 K filing requirements, or you were still getting your head around the 2021 changes, the IRS has swung us a curveball, with new changes for 2023.
If you’re a payment company, or you issue payments for any kind of goods and services – the chances are you need to understand form 1099 K, and what the latest changes mean for your business.
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 pre-2023: What Happened in 2021?
Back in 2021, as part of the American Rescue Plan, new legislation for payment providers was announced, an update to existing regulations in the Internal Revenue Code. This made every Third-Party Settlement Organization sit up and take notice, and was set to add a whole lot more paperwork to the average reporting cycle.
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, it was never that relevant for most organizations until recently. 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 – 2023 Update
In 2021, an announcement was made that Third-Party Settlement Organizations would now need to report for any goods and services transactions that exceeded $600 in any financial year. The government removed the requirement for a minimum number of transactions.
This was set to go into practice for the 2022 tax year, but more recently, the IRS has announced that 2022 will be a transition period, where businesses can familiarize themselves better with the new rules, before they come into action for 2023. That means that for 2022, payment card and Third-Party Settlement Organizations are only required to report transactions under the old rules, where gross payments exceed $20,000 and amount to more than 200 transactions.
What Do I Need to Know for 2023?
While many businesses have been delighted by the extra time to put processes into place, it’s unlikely that the IRS will put the new legislation off again. It’s critical that businesses get to know what their reporting obligations are under the new laws.
Here’s an example of when Third-Party Settlement Organizations would need to report earnings:
Let’s say 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.
Why are 1099 K Requirements Changing in 2023?
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, this 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 2023 and 2024 Dates for the Diary: When Do I Need to Submit Form 1099 K?
If you had 2022 dates in your diary, you weren’t wrong! When the rules were first announced, they were set to go into action in 2022. However, the update means that 1099 K filing will now only be mandatory from 2023, so any payments made before January 1st 2023 do not need to be included.
TSPOs must send Form 1099 K to individuals by February 2024 for all payments made between January 2023 and December 2023. That means you should already have processes in place 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 2024, once you have complete records. Mark these dates on your calendar: The deadline for filing 2023’s Form 1099 K with the IRS is February 28th, with an extension for e-filing to April 1st.
Post 2023, What Does the Future Hold?
The freelance economy is booming and tax authorities want to ensure they are adjusting their tax filing rules to the new workforce. You can expect that in a similar way to how many countries have added employee misclassification compliance regulations and penalties, additional countries will follow suit on monitoring and managing payments coming through Third-Party Settlement Organizations.
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