The new year brings with it new changes, and not only in our personal lives. Our businesses often face changes in the new year as well. Whether the changes come via internal policies or by external forces we must be prepared for the changes our business will face in the new year. Among those changes, small businesses must be prepared for in 2022 are changes regarding taxes.
Third-Party Settlement Organization Transactions
Perhaps the most influential change small businesses will be faced with in 2022 pertains to reporting of income from third-party settlement organizations transactions. Many small businesses and individually owned and operated businesses rely on third-party networks to receive payments for goods and services provided. Examples of third-party networks many small businesses use to accept payment are Venmo, PayPal, Zelle, and Cash App, among others. This change comes as a part of the American Rescue Plan Act of 2021.
Beginning in 2022, if a small business or individual receives more than $600 in total payments during the course of the year the payment service used will be required to report that amount to the IRS. This is in contrast to the previous structure that required small businesses to report these amounts themselves (of course the small business or individual should still independently report this income to the IRS on their taxes and not rely solely on the third-party settlement organizations to make required reports for them). Thus, small businesses can now expect to receive a Form 1099-K from the third-party settlement organizations they use to accept payments. The Form 1099-K will include the revenue from the purchase of goods and services that the third-party settlement organizations reported on your behalf to the IRS made in that year. Small businesses can expect to begin receiving Form 1099-Ks for the 2022 tax year after January 31, 2023.
How will the Service Know I am Receiving Payments for Goods or Services?
In a release on their website, PayPal indicated that both PayPal and Venmo will provide a method for users to tag their peer-to-peer transactions as either personal/friends and family or goods and services. This will allow the services to make distinctions between which transactions count towards the $600 threshold that will trigger the requirement for a 1099-K.
What do I need to do in 2022 when the 1099-K Threshold Change takes effect?
Your third-party settlement organization of choice may ask for your tax information, such as a Social Security Number or Tax ID if they have not asked for this information already. This will allow the third-party settlement organization to accurately file a Form 1099-K with the IRS. Ultimately, this change required tax forms should not have an impact on the way you use third-party settlement organizations. For most businesses the primary change they notice is the number of Form 1099-Ks they receive.
As stated above, beginning in 2022 individuals and businesses who received payments in excess of $600 through third-party settlement organizations will receive a Form 1099-K. Another new change for 2022 is that there are no minimum transactions to trigger this rule. This is a decrease from the past where the transaction threshold was $20,000 and a minimum of over 200 separate payments in a calendar year. The Form 1099-K contains the gross amount of all reportable payment transactions. Taxpayers should expect to receive a separate Form 1099-K from each third-party settlement organization they utilize.
Businesses must report all income received. Thus, it is important your business’s books and records from third-party settlement organizations match the information provided on the Form 1099-K. It is necessary to note that the amount reported on the Form 1099-K is a report of total payments and not a report of total taxable income. Payments that eventually get refunded, due to returns or other reasons, will be reported on the Form 1099-K. These amounts should not be reported as taxable income. Additionally, not all transactions are conducted through a third-party settlement organization so your reported income may be more than appears on the 1099-Ks you receive. Though with the increase of online business the Form 1099-K will continue to be a useful tool for businesses balancing their books each tax season.
For more information on the Form 1099-K, the IRS has published a question and answer page specifically addressing third-party settlement organizations and the Form 1099-K.
Individuals will notice a few tax changes in 2022 as well.
For the 2022 tax year, the IRS made slight increases to the income thresholds for all seven federal tax brackets. These changes that apply to all filing statuses are done to account for inflation. The IRS made the changes to prevent what is commonly known as “bracket creep,” a concept that pushes taxpayers into new tax brackets when receiving standard increases in income due to factors such as inflation. For the 2022 tax year, the IRS also made incremental increases to the standard deduction, which reduces your taxable income.
Taxes on capital gains are divided between short-term gains and long-term gains. For the 2022 tax year, the IRS increased the income threshold for taxes on long-term capital gains.
Earned income tax credit is a refundable tax credit for low- and moderate-income workers. The IRS adjusted the income credit range on these refunds for the 2022 tax year. The most significant change in this area is the credit available to persons without children. The credit has significantly decreased in 2022, from $1,502 to $560. This is because the credit was temporarily boosted in 2021 by the American Rescue Plan Act, implemented in response to the COVID-19 pandemic. The decrease in the credit reflects a correction to the status of the credit before the pandemic.
Finally, the amount individuals can contribute to an IRA or 401(k) retirement plan to receive a tax cut has increased for the 2022 tax year.
States have also implemented a few tax changes for 2022. Five states (Arizona, Arkansas, Louisiana, North Carolina, and Oklahoma) cut individual income taxes for 2022. The District of Columbia is the only jurisdiction to raise individual income taxes in 2022. Four states (Arkansas, Louisiana, Nebraska, and Oklahoma) decreased corporate income tax rates, while Florida implemented an increase in its corporate income tax rate. Additionally, Iowa is implementing a plan to eliminate its inheritance tax.
Taxes are inevitable and affect everyone. Thus, it is important to stay up-to-date on all tax changes every year.