The tax reporting requirements for third-party payment processors like PayPal and Venmo have been updated for the 2022 tax season. Here is everything you need to know about it and what to expect.
Starting from January 1, 2022, third-party payment processors are required to report transactions totaling over $600 to the Internal Revenue Service. Naturally, you’ll also get a tax form in the mail reporting these payments so that you can attach it to your federal income tax return and inform the IRS how much you’ve earned.
Before the 2022 change
Prior to the changes, third-party payment processors were only required to furnish their users only if their gross income exceeded $20,000 or had more than 200 transactions. With this change, many small businesses who accept charges from these payment channels will receive 1099-K, Payment Card and Third Party Network Transactions.
Many of the taxpayers and small business owners who otherwise wouldn’t receive this form will and must attach it to their federal income tax returns. You can see the gross amount of the payment card and the third-party network transactions on Box 1a of 1099-K.
What this means for your 2022 taxes
In the grand scheme of things, this change in the tax law won’t make any difference. That’s, of course, unless you weren’t reporting the income you’ve earned on PayPal or any other third-party payment processor. While tax evasion is a serious crime that could result in jail time, that’s a whole another topic.
For the 2022 taxes, there isn’t anything to worry about as this change is about the third-party payment processors, not taxpayers. The only way you might find yourself affected by this change is the extra paperwork that comes with attaching tax forms to your federal income tax return. That said, you won’t experience a real difference.
What is 1099-K?
Form 1099-K, Payment Card and Third Party Network Transactions is one of the information returns that are a part of the Forms 1099. If you’re a freelancer or an independent contractor, you must be familiar with the 1099-MISC or 1099-NEC. Form 1099-K is pretty much the same but reported by the third-party payment processors, not the payer.
One vital thing about 1099-K and other forms is that you might receive both of them. Since the person(s) that hire you will want to get tax benefits for the income paid to you for the services provided, you’ll get them both. Getting both forms doesn’t mean that you will pay taxes on both amounts – there is no double tax.
As usual, file your federal income tax return and only count your gross income, even if this income is reported on multiple tax forms/information returns.
There is no special way to attach Form 1099-K to your federal income tax return. Attach it the way you attach any other tax form. If you’re electronically filing, you won’t need to do anything, but when paper filing, make sure to staple the forms on the right or left corner of 1040.
When the number of tax forms you’re attaching is too much, as long as you put them all in the same envelope/packaging, you’re good to go. Learn more about 1099 forms.