Do I Need a 1099: Taxes and Digital Payments

by Lisa Brennan

Do you have cash on you? Can you write me a check? Odds are that the answer to both of these questions is “no.” The rise of internet payment methods mean that more and more transactions are taking place online via quick payment systems like Venmo, Zelle, or CashApp. What began as a quick and easy way to pay back your friend for concert tickets is now ubiquitous in the business world as well. It’s quick and convenient for both customer and business owner.  But when money changes hands, you may be wondering what this means for your tax return this year. Will my payment provider be issuing any tax documents to me this year?

What’s the new IRS Rule?

If your business is accepting payments for goods and services via an app – like Venmo or Paypal (called third party settlement organizations (TPSOs) under the law)—the IRS is phasing in new reporting rules to address these payments. Certain payments are required to be reported on a form 1099-K, which is issued to you directly by the TPSO. You will then use the information provided on this form when you prepare your tax return, as applicable.

Initially, the requirement is for a 1099-K to be issued to you for all payments received of $600 more in a given tax year. The IRS has announced that they have delayed this reporting requirement. Taking into account feedback from taxpayers and tax professionals alike, there will be a phase-in approach for the reporting rule. A 1099-K will only be required for over $20,000 in payments and if you have more than 200 transactions in 2023. In 2024, the plan is to lower that threshold to $5,000 and ultimately, adjust to the $600 reporting requirement.

More guidance on understanding your 1099-K can be found on the IRS website here.

I’m in Virgina. Is the rule the same?

No! If you are in Virginia, the reporting threshold for 2023 is $600 and there is no phase-in approach like there is under the federal law. What this means is that while payments you collected online may be well under the 1099-K reporting threshold for your federal tax return, you may still receive a 1099-K. Keep this in mind when filing your tax returns this year as you may have reporting and tax requirements for your state tax return that are different than your federal tax return.

More information on the 1099-K reporting threshold in Virginia can be found here.

I use Venmo to pay my roommate my half of the rent. What does this mean for me?

For those who use app payments methods as a convenient way to exchange money between friends and family, luckily, these 1099-k reporting requirements will not apply to you. As you are not collecting funds for the sale of goods and services, these types of friendly transactions are exempt.

I received a 1099-K. What do I need to do with it?

The 1099-K form is an informational reporting form only. All or a portion of the amounts on the 1099-K may or may not be subject to taxes, depending on your unique tax situation.

Tax season can be a challenge, especially with ever changing rules and regulations. The attorneys at Way Law (and your trusted tax professionals) can help you navigate this complex landscape for your business.