Does your organization accept donations or payments through popular apps such as Zelle, Venmo, or PayPal? Do you pay invoices or freelancers using these apps? If so, then it is important that you know about the new changes signed into law this year concerning how payments are reported through these apps.
Changes for Third Party Settlement Organizations Effective January 1, 2023
Effective January 1, 2023, a new law signed into effect requires all third-party settlement organizations (TPSOs) to report payments exceeding $600 total. The previous law required reporting only for payments exceeding $20,000, so the new law will require all TPSOs to report many more transactions.
Organizations that have received more than $600 total during 2023 through these types of payment apps will receive a form 1099-K from the TPSO. The form is intended to help improve reporting accuracy.
Business Impacts of the Reporting Change
The threshold changes from $20,000 to $600 means that all organizations must now keep careful track of payments received through popular payment apps and report them accurately. Entities are responsible for tracking their payments and reconciling them against forms 1099-K received from TPSOs.
Why Did the Law Change?
The IRS claims the law is needed to ensure income and taxes are accurate. With the growing popularity of payment apps, and the rise of the gig economy, the IRS is essentially trying to track down all the small amounts moving back and forth among consumers, freelancers, nonprofits, and businesses, and ensure that everyone is paying their fair share of taxes.
Who Issues Form 1099-K?
The TPSOs are responsible for issuing form 1099-K. However, organizations must ensure they are accurately tracking the income and the payment processor. You can use any form 1099-K issued to your organization to reconcile payments received via that TPSO.
What Tax Is Payable on Form 1099-K Income?
The answer is “It depends.” Form 1099-K income is just like any other income stream into your organization. Whether or not you owe taxes depends on many factors.
Just like receiving a 1099 from a business, a 1099-K merely lists the amount of income received. It should be recorded as income and then considered as you prepare your end-of-year taxes. The form is an added measure that enables both the IRS and the receiving entity to reconcile all income during the taxation year.
Where Do I Go for More Information?
The first step is to review the IRS information on Form 1099-K. This should clarify many of the points covered above.
If you still have questions about how to account for income listed on Form 1099-K, speak with your CPA or Welter Consulting. We can help you with audit preparations, accounting questions, software consideration, migration and support, and other nonprofit accounting needs.
As with all things, this information is subject to change. As of this writing, there’s yet another bill in Congress that would reverse the $600 threshold back to the original $20,000 threshold that was in place for many years. If this bill should pass, it will not impact 2023, however, so you should watch for 1099-Ks to arrive after January 1, 2024, for the tax year ending December 31, 2023, if you use third party payment systems.
Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.