1099-K's are issued by "third-party settlement organizations" (TPSO) which historically have been our merchant services providers. The American Rescue Plan of 2021 changed the reporting threshold for TPSOs. The new threshold for business transactions is $600 per year; changed from the previous threshold of more than 200 transactions per year and/or exceeding an aggregate amount of $20,000.
One of the reasons for changing the reporting limits was to include Venmo, Zelle and similar services in an effort to capture the volumes of funds being "transferred" by small businesses using these methods.
While the IRS issued a statement delaying the new requirements, many platforms will comply anyway and not all amounts on these 1099-K forms will be Gross Income. Be sure to scrutinize these forms carefully as they no longer include only credit card transactions from your customers. Some may be reporting additional income to the IRS.
An example of how this can happen? Two individuals lunch together a few times a month. Most of the time Sue pays for the lunch with a payment card and Jane reimburses Sue online using Venmo. If Jane has not indicated on Venmo that the payments were personal (nonbusiness), and these added up to more than $600 for the year, Sue is likely to receive a 1099-K for that year. Small business owners that use a cash exchange platform will often go back and forth between personal and business transactions without a thought, not realizing that the provider will be reporting to the IRS.
This is just one example of nontaxable transactions that may trigger a troublesome 1099-K, especially for small businesses.
