Starting in 2021, the IRS is making some changes to bring efficiency and increased accuracy to its reporting and compliance processes. This brought a few updates to the 1099-K reporting, notably, a lower threshold that will have a big impact on sellers.
This threshold change comes as a result of the American Rescue Plan Act that was signed into law on March 11, 2021. This threshold change will become effective in 2022.
Redesigned Form 1099-MISC
The IRS revised Form 1099-MISC for the 2020 tax year to accommodate the creation of a new Form 1099-NEC. The redesigned 1099-MISC has different box numbers for reporting certain income.
New Form 1099-NEC
Form 1099-NEC is a new form for the tax year 2020 for nonemployee compensation of $600 or more to a payee. This form should be filed with the IRS, on paper or electronically, and sent to recipients by February 1, 2021.
There is no automatic 30-day extension to file Form 1099-NEC. However, an extension to file may be available under certain hardship conditions. Also, nonemployee compensation may be subject to backup withholding if a payee has not provided a taxpayer identification number to the payer or the IRS notifies the payer that the Taxpayer Identification Number provided was incorrect.
Businesses must send Form 1099-MISC to recipients by February 1, 2021, and file it with the IRS by March 1 (March 31 if filing electronically).
If businesses are using Forms 1099-MISC to report amounts in box 8, Substitute Payments in Lieu of Dividends or Interest, or box 10, Gross Proceeds Paid to An Attorney, there is an exception to the normal due date. Those forms are due to recipients by February 16, 2021.
The IRS has announced a new gross payment threshold as part of its reporting requirements. Prior to this new change, you will have received Form 1099-K from a credit card/payment company if in the previous calendar year you received payments:
- From payment card transactions (debit, credit or stored-value cards), and/or
- In settlement of third-party payment network transactions above the minimum reporting thresholds of –
- gross payments that exceed $20,000, AND
- more than 200 such transactions
However, beginning in 2022, the new gross payment threshold is $600. Going forward, this new update means that you are required to file a 1099-K form and report it to the IRS and the customer if they exceed $600 a year. A big change from $20,000.
Why lower the threshold now? With the rise of the gig economy and self-employment trends, workers who earned less than $20,000 a year didn’t receive a 1099-K form from the company, and some were misreporting their income and underreported what they made. Altogether making their tax information incorrect.
With this new curveball, don’t leave your taxes to chance. Give us a call about preparing your taxes.