In the past, the IRS often didn't know about payments made through PayPal or similar services. But in 2002, new tax reporting rules take effect.
If you work as an independent contractor and get paid through PayPal or a similar third-party settlement organization, are an Airbnb host, or sell goods on eBay, Etsy, or another website, you need to know about a little-noticed change in the tax reporting rules that goes into effect in 2022.
Because of this change, it will be harder than ever to hide income from the IRS.
Third-Party Information Reporting
The IRS has a series of forms beginning with the number "1099" that financial institutions, employers, and businesses are supposed to file to report various types of payments to the IRS. The IRS matches the figures on these information returns with the amount reported on the recipient's tax return to determine if underreporting occurred.
If you're an independent contractor, your payments get reported to the IRS one of two ways. First, if you're paid over $600 during the year by check, cash, money order, or direct deposit, the business that hired you is supposed to file IRS Form 1099-NEC with the IRS reporting the payments. Form 1099-NEC replaced Form 1099-MISC in 2021.
However, if you're paid through a third-party settlement organization (TPSO) like PayPal, the payor doesn't have to report the payment to the IRS on Form 1099-NEC. Instead, the TPSO has to file a different form called "Form 1099-K" with the IRS.
Third-Party Information Reporting Before 2022
Before 2022, 1099-K reporting had a big hole. Under the law at the time, a 1099-K needed to be filed only when the annual payments to the recipient totaled more than $20,000 and there were more than 200 transactions. So, many payments went unreported. If you had less than $20,000 in payments and less than 200 transactions, the IRS would have no report of the payment. But you were still supposed to report the income on your tax return.
These rules apply to independent contractors who bill clients directly and to those who get clients through online hiring platforms like Upwork (or Uber, Lyft, Handy, and many others). These online platforms often serve as TPSOs themselves or use PayPal or similar third-party TPSOs.
The same goes for short-term rental hosts who use online platforms like Airbnb and VRBO to book and bill their guests. Likewise for online platforms used to sell goods, like eBay and Etsy.
1099-K Reporting Hole Closes Starting 2022
The 1099-K reporting hole closes in 2022. Starting January 1, 2022, the $20,000/200 transactions rule ends. Instead, a TPSO, like PayPal, will have to file a 1099-K if a recipient is paid $600 or more during the year for goods and services, with no minimum number of transactions requirement. So, even a single transaction for $600 or more will require a 1099-K.
Many millions of additional forms 1099-K will have to be filed starting in 2023 to report payments made in 2022. But don't worry about a 1099-K getting filed if you use PayPal or a similar service to reimburse friends or relatives for expenses or make charitable contributions. 1099-K forms only have to be filed for transactions for goods and services.
Also, starting in 2022, expect PayPal or any other TPSO you use to ask for your taxpayer identification number (TIN) (your Social Security number or Employer Identification Number). If the TPSO fails to get your TIN, it will have to withhold 24% of your payments over $600 and send the money to the IRS—a process called "backup withholding."
Effective date: January 1, 2022
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