There seems to be a lot of confusion around the IRS $600 rule for payments processed on third-party networks. Which should surprise no one; confusion and the IRS have a long history.
In defense of the IRS, the agency has gotten much better. Taxation is a complex business, and it isn’t always easy to simplify complex instructions.
The case of the $600 rule seems to me to be one where we can have some simple clarity. Let’s take a look at it in pieces.
Reporting Business Income
The IRS has always required taxpayers to report all business income. That has not changed. What has changed is the threshold of income at which a third-party payment network may have to report your income to you and the IRS.
Under the old rules, third-party payment networks needed to report your business income when the total of your transactions received exceeded $20,000 in a year and you had over 200 transactions.
The new rule is that third-party payment processors need to report to you and the IRS when your total of payments received for goods and services exceeds $600 for the year, with no transaction minimum.
Two things to note here.
The total is for funds you received, not including funds you sent. The issue is income, not what you’re spending money on.
The other important piece here is what we’ll look at next: that it is payments for goods and services.
Goods and Services Payments
Third-party payment processing services are required to report your income on a form 1099-K when the payments for goods and services exceed $600 in a calendar year. This means that payments to family and friends are not included.
How this looks depends on the processor. PayPal, for example, requires senders to code each payment as either a personal payment or as payment for goods and services. These personal payments don’t have a transaction fee, although they can have a credit card use fee. And these personal payments, naturally, have no buyer protection.
The bottom line is that if you’re using a third-party system to split lunch with friends or to send cash to your daughter who’s away at school, these transactions shouldn’t be part of your reportable transactions.
Then things get a little messier.
The $600 Limit
Let’s say you sell some of your personal belongings, could be at a yard sale, or through an online platform, whatever. And you take payment via a third-party processor. How the payment is coded determines whether or not the transaction is included in the amount reported.
If the money is a personal payment, it won’t be part of the reportable amount; if it’s sent as a payment for goods and services, it will be.
In either case, you would generally not have a taxable event; because most of the used stuff you sell you sell at a loss and don’t have a taxable event. If, however, you sell an item for more than you paid for it, the IRS would expect you to include that income on your tax return, same as always.
Who Reports What
Here seems to be where a good deal of the confusion lies. Let’s take it piece by piece.
You sold some stuff, or provided some services, and generated in excess of $600 of income in the year using a third-party service for payment. The third-party payment processor is required to report that income to you on a form 1099-K and provide that information to the IRS.
You are required to report any business income on your tax return.
And if you have a form 1099-K, you’ll want to report that income, even if it doesn’t generate a taxable event. For example, if you had $15,000 of business income but $16,000 of ordinary and necessary business expenses, you would report that but it’s not causing you additional taxes.
The confusion seems to stem from how the word “report” is being batted around. The third-party processor reports the income to you via form 1099-K. You report the income to the IRS on your tax return.
You are not making form 1099-Ks and sending them off to people you paid, or to people who paid you. You're not reporting income or anything else to anyone other than the IRS; you’re not sending out 1099-Ks. This is not clear in some of the pieces I’ve seen online.
Other Things to Know
Many people who use third-party payment services will not get 1099-Ks. If you use them exclusively for personal payments, you shouldn’t get a 1099-K.
If you receive $600 or less that was coded as payment for goods and services, you shouldn’t get a 1099-K.
Note that each third-party payment processor will do this independently; they’re not adding the transactions from one onto the transactions from another.
Dealing with Mistakes
There will be mistakes.
You might get a 1099-K that you shouldn’t have gotten, either due to miscoding of transactions or some other reason. The place to start to try to fix this is with the payment processor. The issuer of the 1099-K is who should fix the form, if it is an error, and send you a revised 1099-K.
The Bottom Line
I would think that most people who use payment apps primarily to split bills and so forth will not receive 1099-Ks from their third-party processors.
If you sell stuff, and payments you received were coded as for goods or services, you can expect to get a 1099-K from each third-party provider who shows you received over $600 of these payments last year.
What’s taxable or not taxable has not changed. The IRS has lowered the bar for reporting transactions in order to try to catch more taxable income from slipping through the cracks. If it needs to be reported as taxable income now, it was supposed to be reported as taxable income before; the difference is now you know they know.