IRS Postpones Change to Digital Payment Reporting Rules for Small Businesses and Side Businesses

By Chicago 5 Min Read

New York CNN –

For the second consecutive year, the IRS has decided to postpone the implementation of a rule change that would take effect Tax filers who receive business income for their goods and services through payment apps and online marketplaces such as Venmo, CashApp, Etsy, and Airbnb, among others.

The change could have resulted in 44 million more 1099-K Forms sent in January to such filers, including small business owners, freelancers, people with side businesses and temporary workers.

In explaining why it is postponing implementation again, the IRS cited concerns about potential taxpayer confusion and the need to make it easier for all parties to comply with the change.

“We have spent many months gathering feedback from third-party groups and others, and it has become increasingly clear that we need more time to effectively implement the new reporting requirements,” said IRS Commissioner Danny Werfel. “We want to make this as easy as possible for taxpayers. We will work to make the new reporting requirements easier for them and will work closely with third-party groups, tax professionals and others to find the smoothest path to ensuring compliance with the law.”

For this fiscal year, the reporting rule that has been in place for years still applies.

Third-party payment platforms, also known as third-party settlement organizations, must report your January gross business income to you and the IRS only if you conducted more than 200 business transactions on that platform and earned more than a total of $20,000 from them.

A business transaction is defined as a payment for a good or service, including tips. It doesn’t include personal transactions, like paying your friend for his share of dinner. Or for money you send your child to pay the expenses.

(Should you receive a 1099-K in error, either because your business transactions did not exceed this year’s thresholds or because the form reflects personal money transactions, check out this IRS page on how to correct the situation).

The rule change, implemented as part of the 2021 American Rescue Plan, will eventually require third-party platforms to issue you a 1099-K if you earned more than $600 in annual business income on one or more business transactions.

But the IRS said Tuesday that for tax year 2024, instead of implementing the $600 threshold, it will “phase in” the change and require third-party platforms to issue you a 1099-K only if your business transactions exceed the 5,000 dollars.

“This phased approach will allow the agency to review its operational processes to better address taxpayer and stakeholder concerns,” the IRS said.

The 1099-K Tax Fairness Coalition — which includes the Electronic Transactions Association, Airbnb, PayPal, Eventbrite, Etsy, Poshmark and others — said the delay will give members of Congress time to find a “solution permanent and bipartisan” to the rule. Lawmakers on both sides of the aisle — including Democratic Sen. Sherrod Brown of Ohio and Republican Sen. Bill Cassidy of Louisiana — have pushed for a higher income threshold to be used.

“The Biden administration’s decision represents a victory for common-sense tax policy, ensuring that consumers do not face a tsunami of 1,099 thousand in January,” said Arshi Siddiqui, partner at Akin Gump, who is leading the effort of Coalition lobbying.

Regardless of the delay or change in the rules, your tax obligations remain the same

Neither the delay in changing the rules nor its possible implementation will in any way change the tax burden.

This is because you have always been obligated as a taxpayer to report the money you earn from your business activities to the IRS.

The difference once the rule change goes into effect is that the IRS will learn your business income from a third-party payment platform. This will make it more difficult for someone to evade taxes owed if he is tempted to underreport what he has earned.

And the change will effectively pull back the curtain on how much business revenue is generated on third-party payment platforms.

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