Earn Side Income? Know This New Tax Rule

A new rule by the Internal Revenue Service (IRS) changes the way third party network transactions are reported on Form 1099-K for self-employment income earned in 2022 and beyond.

Form 1099-K is used to report payments you receive from payment settlement entities (PSEs) that process payment card or third party network transactions. Payment cards include debit, credit, or prepaid credit cards. Examples of third-party network transactions include those processed by Venmo, PayPal, and Zelle.

In the past, you received Form 1099-Ks from all payment card entities, regardless of the amount or number of transactions. You also received a Form 1099-K from any third-party network through which you had more than 200 transactions and more than $20,000 in gross payments.

Beginning with tax year 2022, the number-of-transactions threshold (200) is eliminated entirely and the $20,000 gross-payments threshold is reduced to $600 for third party network transactions. The rules for payment card transactions remain unchanged. You should receive a 1099-K from all PSEs that process credit card, debit card, or prepaid credit card payments on your behalf and from any PSE that processes more than $600 in third party network transactions.

1099-K Rules for Income Earned in 2021

For tax year 2021, you should receive a Form 1099-K from any payment settlement entity that processes:

• Any payment card transactions (credit, debit, prepaid credit cards) with no threshold
• Third party network transactions, provided that the entity processes more than $20,000 and the number of transactions exceeds 200.

The gross amount of any reportable payment is as of the date of the transaction and does not include adjustments for credits, cash equivalents, discounts, fees, refunds, or any other amounts.

1099-K Rules for Income Earned in 2022

For tax year 2022, you should receive a Form 1099-K from each payment settlement entity that processes:

• Any payment card transactions as noted above with no threshold
• Third party network transactions of more than $600 with no number-of-transactions threshold

The gross amount of any reportable payment is as of the date of the transaction and does not include adjustments for credits, cash equivalents, discounts, fees, refunds, or any other amounts.

Reporting 1099-K Income

If you are self-employed, report your 1099-K payments on Schedule C as part of your gross receipts. Depending on your filing status you use Schedule E or F instead. Make sure the amount shown on your 1099-K accurately reflects payments you received for your business.

For example, transactions through PSEs for personal gifts, charitable contributions, and reimbursements are specifically excluded from Form 1099-K reporting. It is possible, however, for personal transactions to be included in Form 1099-K reporting if the recipient receives payment through their business account.

Other nonreportable transactions include:

• Withdrawal of funds from an automated teller machine (ATM) via payment card, or a cash advance or loan against the cardholder's account.
• A check issued in connection with a payment card that is accepted by a merchant or other payee.
• Any transaction in which a payment card is accepted as payment by a merchant or other payee who is related to the issuer of the payment card.

Keep in mind that the amounts reported on 1099-K, just like those reported on 1099-MISC or the new 1099-NEC are gross receipts and do not reflect any deductions or expenses you may have. Those are reported elsewhere on your Schedule C.

The American Rescue Plan Act and Form 1099-K

Changes to 1099-K rules for tax year 2022 are mandated by the American Rescue Plan Act (ARPA) which also clarifies that third party network reporting on Form 1099-K is intended to apply only to transactions for goods and services. 

Since the first use of Form 1099-K in 2012, there has been confusion about whether reporting for third-party networks involved transactions other than goods and services. This confusion arose because the definition of a third party network transaction included “any transaction which is settled through a third party payment network.”

ARPA makes it clear that payments for royalties, rents, and other types of transactions settled through a third party payment network are reportable on Form 1099-MISC and only transactions for goods and services are reportable on Form 1099-K.

The impact of ARPA will be a significant increase in the number of Form 1099-Ks that PSEs are required to file each year. If you receive payments processed by third-party networks, you should carefully monitor those payments and the total amount received from each PSE to ensure you are issued a 1099-K, if appropriate. If not, contact the third-party network or PSE to resolve the issue.