Editor: Susan Minasian Grais, CPA, J.D.,LL.M.
The American Rescue Plan Act of 2021 (ARPA), P.L. 117-2, recently lowered the de minimis threshold for information reporting on third-party network transactions. This change will substantially increase the number of Forms 1099-K, Payment Card and Third Party Network Transactions, required to be filed with the IRS and furnished to recipients by third-party settlement organizations and their electronic payment facilitators.
Under the new rules, the threshold for the information reporting requirement will decrease to $600 (for any number of transactions), effective for 2022 Forms 1099-K (due to be filed in 2023).
Under Sec. 6050W, a payment settlement entity that makes a reportable payment to a participating payee must meet certain information reporting requirements on Form 1099-K. A reportable payment can result from a payment card transaction or a third-party network transaction.
Payment card transactions are usually reported by banks acting as merchant-acquiring entities, which process credit card transactions on behalf of a merchant. There is no de minimis dollar threshold for reporting payment card transactions.
Third-party settlement organizations (TPSOs) are generally marketplaces that connect buyers and sellers of goods or services. Transactions settled by TPSOs are third-party network transactions. Many web 2.0 e-commerce websites and gig-economy services are TPSOs for Form 1099-K reporting purposes.
A third-party payment network is any agreement or arrangement that:
- Involves the establishment of accounts with a central organization by a substantial number of providers of goods or services (generally considered to be more than 50) that are unrelated to the central organization and have agreed to settle transactions for the provision of goods and services with purchasers according to an agreement or arrangement;
- Provides standards and mechanisms for settling such transactions; and
- Guarantees payment to the providers of goods and services in settlement of transactions with the purchasers.
There is an exception from reporting by TPSOs for payments made through an electronic payment facilitator (EPF). When a TPSO contracts with an EPF to make payments in settlement of third-party network transactions on behalf of the TPSO, that EPF must file the applicable Forms 1099-K instead of the TPSO. There is no requirement that the EPF have any agreement or arrangement with the participating payee, and the payment need not be made directly from an EPF's account; an EPF need only submit instructions to transfer funds to the account of the participating payee in settlement of the reportable transaction.
A Form 1099-K filer must report the gross amount of reportable transactions for each month and for the entire year in separate boxes on the Form 1099-K. In addition, a filer must obtain each payee's taxpayer identification number (TIN) before making a reportable payment, or the filer must impose backup withholding at a rate of 24% on the gross amount of the payment. As of this writing, there is no specific method by which a payee's TIN must be collected; however, a provision in the Biden administration's proposed budget, if enacted, would require Form 1099-K filers to collect payees' TINs on a Form W-9, Request for Taxpayer Identification Number and Certification.
Modified reporting threshold
Currently, a TPSO is not required to report third-party network transactions for a participating payee unless the amount to be reported exceeds $20,000 and the aggregate number of transactions with that participating payee exceeds 200. Under Section 9674(a) of ARPA, however, the $20,000/200 transaction threshold will decrease to $600 (for any number of transactions) effective for 2022 Forms 1099-K (due to be filed in 2023).
In addition to the reduced threshold for Form 1099-K reporting, the updated guidance makes it clear that reportable third-party network transactions only include transactions for goods and services. Transactions for personal gifts, charitable contributions, and reimbursements are specifically excluded from Form 1099-K reporting.
The reduction in the de minimis reporting threshold for third-party network transactions will create significantly more reporting for TPSOs and the EPFs that process payments for them. EPFs can be uniquely challenged by Form 1099-K reporting for two primary reasons:
- They do not necessarily know that their clients are TPSOs. An EPF may be hired by numerous clients to effect payments on their behalf but may not know whether its client meets the TPSO criteria. For example, an EPF may not know whether a client "guarantees" payment. An EPF should be able to rely on a representation from its client as to whether the client is a TPSO. No IRS guidance, however, allows for such reliance.
- As noted in the regulations under Sec. 6050W, an EPF does not necessarily have a relationship with a participating payee. An EPF that must report payments to a participating payee on a Form 1099-K must obtain the payee's TIN. The IRS should allow an EPF to obtain participating payees' TINs from the TPSO for which it makes reportable payments. No IRS guidance, however, allows for such reliance.
Associated with the increase in information reporting requirements is the potential for increased penalties. Forms 1099-K are subject to the same information reporting penalties as other information returns, i.e., for 2021 information returns, $280 per failure to file each Form 1099-K and $280 per failure to furnish each payee statement. The maximum information return penalty is $3,426,000 per year, as is the payee statement penalty, for a potential total of $6,852,000. (These amounts are adjusted for inflation each year.) To prepare for 2022 reporting, TPSOs and EPFs may want to evaluate their internal information reporting processes and systems to assess their ability to comply with the new reporting threshold. Failure to comply with the rules could subject TPSOs and EPFs to significant penalties for lack of compliance.
Additional Form 1099-K reporting also means additional backup withholding responsibilities. If a participating payee is subject to backup withholding, TPSOs and EPFs must have processes in place to properly withhold and deposit those funds with the IRS.
Susan Minasian Grais, CPA, J.D., LL.M., is a managing director at Ernst & Young LLP in Washington, D.C. For additional information about these items, contact Ms. Grais at 202-327-8788 or firstname.lastname@example.org.
Contributors are members of or associated with Ernst & Young LLP.