If you work as an independent contractor and are paid through PayPal or by a similar third party settlement organization, are an Airbnb host, or sell goods on eBay, Etsy, or similar websites, you need to know about a little noticed changed 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.
The IRS has a series of forms beginning with the numbers 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).
But there is a big whole in 1099-K reporting. Under current law, a 1099-K need be filed only when the annual payments to the recipient total more than $20,000 and there are more than 200 transactions. As a result, many payments go unreported. If you have less than $20,000 in payments and/or 200 transactions, the IRS will have no report of the payment. However, you're still supposed to report the income on your tax return.
Example: Jane is a consultant who bills a client $5,000 for consulting services during 2021. Her client pays her by PayPal. The client need not file Form 1099-NEC to report the payment to the IRS. PayPal need not file a 1099-K reporting the payment because Jane has less than 200 PayPal transactions for 2021.
These rules apply not only to independent contractors who bill clients directly, but to those who obtain 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.
However, the 1099-K reporting hole is about to close. Starting January 1, 2022, the $20,000/200 transaction rule comes to an end. Instead, a 1099-K will have to be filed by a TPSO like PayPal if a recipient is paid $600 or more during the year for goods and services, with no minimum number of transactions requirement. Thus, even a single transaction for $600 or more will require a 1099-K.
Example: Assume that Jane from the example bills her client $5,000 in 2022 and the client pays her by PayPal. The client stlll need not file Form 1099-NEC to report the payment. But PayPal must file Form 1099-K reporting the $5,000 to the IRS because it exceeds the $600 threshold.