Tax Services • Published 2/06/2023 Form 1099-K Reporting Changes & How to Prepare

If your organization relies on popular apps to accept payments but has never received a Form 1099-K, that might be about to change. More users of third-party settlement organizations (TPSO), such as PayPal and Venmo, will receive a 1099-K this year due to recent changes to reporting thresholds. While the original effective date was for the 2022 tax year, the IRS announced a delay to 2023 to allow the TPSOs time to adapt to the new compliance.

What are the new compliance rules for Form 1099-K?

Although Form 1099-K has been around for several years, the IRS recently updated the reporting requirements for TPSO transactions. Typically, merchants and payment processors issue this tax form to report payments made via credit card, debit card, other payment cards, or third-party payment network transactions to the IRS. Form 1099-K must be filed for each payee to whom the merchant or payment processor has made a payment during the calendar year that meets the filing requirements:

For the 2023 tax year, the changes include the following:

• Clarifying that reporting applies only to the sale of goods and services.
• Lowering the reporting threshold from $20,000 to $600.
• Removing the threshold for the number of transactions (previously, it only applied if the number exceeded 200). 

How can you prepare for the changes?  

• Set up separate personal and business accounts. 
• Make sure to pay personal expenses with the personal account and business expenses with the business account.
• Properly label third-party app payments in your accounting software. These transactions should be reported in the same way payments made by credit card are reported, meaning payments reported on a 1099-K should not also be reported on a 1099-Misc or 1099-NEC.
• Be aware of any updates to TPSOs providing the ability to classify transactions.

What processing services are affected?

Form 1099-K applies to all payments made via credit or debit card and other third-party settlement organizations (TPSOs). Some examples include popular apps such as: 

• PayPal
• Venmo
• Square
• Stripe
• Cash App

The IRS notes that the reporting requirements could include other popular online service providers such as Uber, Airbnb, and eBay.

What transactions are reported?

The ARPA clarified that 1099-K reporting requirements by the TPSOs only apply to transactions pertaining to the sale of goods or services. This means that users should not be affected when using the electronic payment systems for personal use, such as gifts, charitable contributions, and reimbursements (i.e., splitting restaurant bills or reimbursing a roommate for rent).

What should you do if you receive a Form 1099-K for a personal item sold and/or reported in error? 

The IRS has issued guidance for various scenarios shown in the chart below:

Scenario	Action(s) to take
Personal items sold at a loss	If you receive a Form 1099-K for a personal item sold at a loss, report the information on Form 1040, Schedule 1, Additional Income and Adjustments to Income with offsetting transactions. For example, if you receive a Form 1099-K for selling your couch online for $700 you will report: Part I – Line 8z – Other Income – Form 1099-K Personal Item Sold at a Loss $700 Part II – Line 24z – Other Adjustments - Form 1099-K Personal Item Sold at a Loss $700 The net effect of these two adjustments on adjusted gross income would be $0.
Personal item sold at a gain	If you sold an item you owned for personal use, such as a car, refrigerator, furniture, stereo, jewelry, or silverware, etc., at a gain, your gain is taxable as a capital gain. Report your gain as explained in the Instructions for Schedule D (Form 1040). For personal items sold at a loss, follow the instructions for Personal items sold at a loss.
Mix of personal items sold – some at a gain and others with a loss	Your gains and losses are to be reported separately and gains for assets cannot be offset by losses from the sale of personal assets. If you sold an item you owned for personal use at a gain, see Personal items sold at a gain for information on how to report. For personal items sold at a loss, follow the instructions for Personal items sold at a loss for information on how to report.
Form 1099-K received in error	If you received a Form 1099-K by mistake or if the form you received has incorrect information, contact the issuer of the Form 1099-K immediately. The issuer’s name appears in the upper left corner on the form along with their phone number. If you can’t get a corrected Form 1099-K, report as follows: Same as personal assets sold at a loss except changing the description as follows: Part I – Line 8z – Other Income – Form 1099-K Received in Error Part II – Line 24z – Other Adjustments - Form 1099-K Received in Error

Contact your P&N tax advisor to discuss the potential impacts on your organization.