Starting next year, if you’re an independent contractor, hosting an Airbnb, or are a gig worker, you are more likely to start receiving 1099s. The American Rescue Plan Act of 2021 was signed into law by President Biden last March, and lowering the 1099 threshold was part of the bill. Popular apps like Venmo and Cash App are going to start sending people 1099s, and you might be one of them. We’re going to teach you who is supposed to get a 1099 and if you should be expecting one.
What are 1099s and who received them?
1099s were first created by Congress to stop tax avoidance. Commonly referred to as “Information Returns,” they are usually one page and provide information to both the IRS and whoever received income so they will not accidentally forget to report income on your tax return. Below is a list of the most common information returns and when you may receive one:
| Information Return | When you may receive one |
|---|---|
| W-2 | You’re an employee of a business |
| 1099-B | You sell stocks or bonds |
| 1099-INT | You’ve receive interest from a saving account |
| 1099-NEC | Working for somebody as an independent contractor |
| 1099-MISC | When you Receive passive income like rent or royalties |
| K-1 | When you’re a member of an LLC, Partnership, or an S Corporation |
There are so many types of 1099s, that we can’t possibly write about all of them. We’ve decided to discuss the most important ones. Here are the ones we’re going more in-depth on:
- 1099-MISC / 1099-NEC
- 1099-S
- 1099-K
1099-MISC and 1099-NEC, what’s the difference?
Prior to 2020 businesses only had to worry about issuing 1099-MISC. Starting in 2020 that changed. Companies may now need to issue both 1099-MISC and 1099-NEC. What’s the difference?
1099-“NEC” stands for non-employee compensation. These would be for independent contractors. However, if you’ve receive money for passive income like Rents, Royalties, or Commissions, you would receive a 1099-MISC (which stands for Miscellaneous).
The reason that the IRS split the 1099s into two separate forms is because of due dates. 1099s issues to independent contractors are due by January 31st, but the other 1099s are due by February 28th. Since the IRS computer system is antiquated, they couldn’t separate the two due date when processing the one form. Additionally, business owners were mailing the returns at the wrong time and getting penalized (1099-NEC are due earlier). The new form cleared up the confusion.
1099-S, the real estate 1099
When you sell, or transfer real estate (including 1031 exchanges), you may receive a 1099-S. That includes if you’re selling your home, a rental, raw land, or commercial property. Here are some common questions I get regarding 1099-S:
Where do I report a 1099-S on my tax return? If you are selling your primary or secondary home, you will report the sale on both Schedule D and Form 8949. However, if you’re selling a rental property, you report the sale on Form 4797.
Do I still have to report it if I don’t owe tax? If you’ve read my article on selling your home and saving taxes, you are aware that if you lived in your property for 2 out of the last 5 years, you may not owe tax. However, if you receive a 1099-S and don’t owe tax, you should still report the sale on your tax return. Otherwise the IRS might send you a letter, which is never a good thing.
Below is an example of how to report a 1099-S sale on Form 8949. In this example, the taxpayer bought a home for $250,000, lived in it for 3 years, and sold it for $400,000.
What is a 1099-K?
In 2012 after the dot com boom, a new 1099 was created named 1099-K. The IRS believed that resellers on websites like eBay.com were making money, and not reporting their income. They are issued to small businesses that accept credit cards, not only in retail stores, but online too. If you own an e-commerce business and use apps like Stripe or Paypal you may receive one.
1099-K Threshold and why it matters – Originally there was a large threshold for businesses to receive these. The threshold was both $20,000 and 200 transactions. That’s way bigger than the $600 threshold for most 1099s. So even if you made $50K, but only had 30 transactions, you wouldn’t get a 1099-K. As part of the American Rescue Plan Act of 2021 the 1099-K threshold has changed, which means more people are going to receive 1099-Ks. Which also means, the IRS is watching.
What are the 1099 Thresholds in 2020, 2021, & 2022?
| Form 1099 Type | 1099 Threshold 2020 / 2021 | 1099 Threshold 2022 |
|---|---|---|
| 1099-MISC for Royalty | $10 | $10 |
| 1099-MISC for others | $600 | $600 |
| 1099-NEC | $600 | $600 |
| 1099-K | $20,000 and 200+ transactions | $600 |
Are Venmo, Zelle, and Cash App, now taxed?
If you use apps like Venmo, Zelle, or Cash App, and own a business, you should already be reporting your income. For those who have been good at keeping records and reporting, nothing changes. However, there may be some of you that have not been very meticulous calculating your side-hustle income, and the IRS now wants to know.
What if I use these apps for personal purposes and not for a business?
According to the IRS, only business income should be reported on the 1099-K, and not personal transactions like splitting meals, or transferring money for rent. Currently apps like Venmo have both personal and business profiles, so hopefully they will only be reporting the transactions from the business profiles. However, being a former IRS agent, I suspect it will only be a matter of time before the IRS requires all transactions through these apps to be reported.
Do you have any suggestions if I use these apps for both personal and business use?
One suggestion is having two separate accounts for each (e.g. a business Venmo and personal Venmo). I know this is extra work, and you may find it annoying, but I believe it’s a simple way to keep your taxable income separated from your personal transactions.
Another option is to only accept one type of payment per app. For instance, I use Zelle for business, but never for personal transactions.
Conclusion
This will not be last we hear of 1099s or changes therein. Even though we weren’t able to cover all types of information returns, we covered important ones. As always, we recommend that you contact a CPA to go over the fine details if your company needs to issue 1099s or if you receive any.