Businesses have been bracing for a new 1099-K reporting threshold for years, only to have each scheduled change pushed back at the final hour. Now, more new 1099 thresholds may be on the horizon thanks to H.R. 7024: Tax Relief for American Families and Workers Act.
The United States House of Representatives overwhelmingly passed H.R. 7024 on January 31, 2024. The bill increases child tax credit provisions, depreciation allowances, the low-income housing tax credit, and tax relief for losses due to natural disasters, among other provisions. It also changes reporting thresholds for at least some 1099 forms, as explained below.
What is a 1099 form?
A 1099 form is an IRS tax form documenting payments made to a business, individual, or entity that isn’t an employee. They’re top of mind at the start of every year because payers are generally required to send the appropriate 1099 form to the payee by January 31, though some 1099 forms are due after that. All 1099 forms must also be filed with the IRS.
There are currently more than 20 different 1099 forms, including Form 1099-K, Form 1099-NEC, and Form 1099-MISC.
Form 1099-K reports non-W-2 income received during the year from the following:
Payment card transactions (credit, debit, or stored value cards, such as a gift card)
Third-party network transactions (payment apps or online marketplaces, including third-party payment settlement organizations)
Form 1099-NEC reports nonemployee compensation — income received for work as a consultant, freelancer, or independent contractor. Form 1099-MISC reports income from miscellaneous sources not covered by another 1099 form, such as awards and prizes, fishing boat proceeds, and rents.
Both the 1099-MISC and the 1099-NEC can be used to report income from direct sales of goods resold anywhere besides a permanent retail establishment (required when the income exceeds the $5,000 reporting threshold). However, these sales should only be reported on one of these forms. Per the IRS instructions, “You may either use box 7 on Form 1099-MISC or box 2 on Form 1099-NEC to report the direct sales totaling $5,000 or more” (emphasis mine).
Payments made with a credit card or payment card and certain other types of payments, including third-party network transactions, must be reported on Form 1099-K by the payment settlement entity. Per the IRS, such payments “are not subject to reporting on Form 1099-MISC.”
What are the 1099 reporting thresholds today?
Form 1099-MISC and Form 1099-NEC both have more than one reporting threshold.
The reporting threshold for the 1099-NEC is $600. However, Form 1099-NEC can also be used to “report sales totaling $5,000 or more of consumer products to a person on a buy-sell, a deposit-commission, or other commission basis for resale.”
A Form 1099-MISC must be filed for each person you paid at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest, or for each person you paid at least $600 health care payments, prizes, rents, and certain other payments.
You can also file a Form 1099-MISC to report direct sales of consumer products to a buyer for resale anywhere other than a permanent retail establishment. The reporting threshold for these direct sales is currently $5,000.
The 1099-K reporting threshold is currently $20,000 and 200 transactions, but it’s scheduled to change.
For the 2023 tax year, an online marketplace, payment app, or payment card company must provide a 1099-K to any business, individual, or entity that earned over $20,000 in aggregate payments and had at least 200 transactions. This includes “sharing economy” or “gig economy” companies like DoorDash, Grubhub, and Uber as well as brokers like Ticketmaster.
“I’m not sure most people realize how many different types of businesses are affected by the 1099-K,” says Kael Kelly, GM of 1099 & W-9 at Avalara.
How did the American Rescue Plan Act of 2021 affect the 1099-K reporting threshold?
The American Rescue Plan Act of 2021 slashed the 1099-K reporting threshold significantly, lowering it from $20,000 and 200 transactions to $600, period. It didn’t alter the $600 reporting threshold for the 1099-MISC or 1099-NEC.
The 1099-K $600 threshold was scheduled to take effect for the 2022 tax year, meaning most forms reporting the new thresholds would have been due by January 31, 2023. However, on December 23, 2022, the IRS announced the threshold would apply to transactions occurring after calendar year 2022 instead. In effect, the IRS gave affected taxpayers an extra year to get their proverbial ducks in a row.
On November 21, 2023, the IRS delayed the threshold change again, making 2023 another transition year. Why? To “reduce the potential confusion caused by the distribution of an estimated 44 million Forms 1099-K sent to many taxpayers who wouldn’t expect one and may not have a tax obligation.”
In the notice dated November 21, 2023, the IRS said it was “planning for a threshold of $5,000 for tax year 2024 as part of a phase-in to implement the $600 reporting threshold enacted under the American Rescue Plan.” After that, crickets. There’s been no further information about whether/when a $5,000 threshold or $600 threshold will actually take effect.
How would H.R. 7024 change 1099 reporting thresholds?
H.R. 7024 would increase the reporting threshold for the 1099-MISC and 1099-NEC from $600 to $1,000 for payments made on or after January 1, 2024. For future years, this threshold would be tied to inflation.
The bill would also decrease the reporting threshold for payments of direct sales from $5,000 to $1,000. As explained above, income from direct sales can be reported on either the 1099-MISC or the 1099-NEC (but not both forms).
H.R. 7024 doesn’t appear to change the 1099-K threshold. That threshold is still on track to drop from $20,000 and 200 transactions to $600 eventually.
What happens next to the 1099 forms in 2024?
The House approved the $1,000 threshold by 357-70, with support coming from both sides of the aisle — though had the 1099 bit been a standalone piece of legislation, the vote may have been quite different. And it’s not a done deal. The bill now goes to the Senate.
Should the Senate follow the lead of the House and pass the bill, notes Kelly, it will create additional complexity for 1099 filers. Dealing with 1099 forms is a hassle for businesses today, and the changes put forward in H.R. 7024 could make 1099 compliance even more complex in the years to come. Dropping the 1099-K threshold from $20,000 and 200 transactions to $600 certainly will, if indeed the change ever takes effect; the IRS expects the lower threshold to increase the number of 1099-K returns by about 28 million.
Are you ready to deal with whatever happens to the 1099 forms?
In late October 2023, Censuswide surveyed gig workers, marketplace sellers, and decision makers at online marketplaces to find out how ready they were for the 1099-K threshold change we all thought was imminent. At the time, just 51% of the gig workers and marketplace sellers said they were “aware and prepared” for the upcoming changes. Read our December 2023 blog, How to prepare your business for the 1099-K changes, for more details.
Now may also be a good time to streamline management of 1099 and W-9 forms. Avalara 1099 & W-9 stores vendor and freelancer information, imports 1099 payee data, and transfers vendor details quickly, all while automatically checking for errors. It also checks for valid TINs/SSNs when W-9s are collected and checks for valid TINs when 1099s are filed, preventing errors and minimizing B-notices, corrections, and manual effort.
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