A reduction in the 2022 payment threshold determines when a third-party settlement organization has to file an IRS information return can mean some big tax changes for people using internet platforms to sell goods and services.
TPSOs Will File Lots More Information Returns for 2022
A third-party settlement organization (TPSO) has always had to file information returns with the IRS to report some payments to payees. Before 2020, the information reporting requirement did not apply until the TPSO made more than 200 payments to the payee that totaled more than $20,000 during the year.
But beginning in 2022, a TPSO must file an information return when its payments to a participating payee exceed $600, regardless of the number of payments. That threshold applies to the TPSO’s total payments to the payee for the year, not to individual payments. Thus, TPSOs like Ebay, Uber and Airbnb will have to start reporting income to the IRS for many people who earn relatively small amounts in the gig economy.
What Do These Terms Mean?
A TPSO is a central organization that is contractually obligated to make payments to participating payees of third-party payees. A central organization is a TPSO if it provides a third-party payment network that enables buyers to transfer funds to providers of goods and services. 1.6050W-1(c)(2)
A third-party payment network is any agreement or arrangement that involves the establishment of accounts by a substantial number of providers of goods and services and provides standards and mechanisms for settling transactions. 1.6050W-1(c)(3).
A participating payee is a person who provides goods and services through a third-party payment network.
Thus, internet platforms that are the mainstays of the “gig economy” – like eBay and Etsy, Airbnb and Vrbo, Uber and Lyft, etc. – are TPSOs because they facilitate transactions and handle payments between buyers and providers of goods and services.
What Isn’t a TPSO?
Sites like Craigslist and Facebook Market are not TPSOs because they do not collect or process payments. Someone who sells goods or services might use these sites to find buyers, but they still must make their own arrangements to get paid.
However, sites like Paypal and Venmo, which process and deliver payments, but do not directly facilitate the sale of goods and services, are subject to their own information reporting requirements. Known as payments settlement entities (PSEs) or merchant acquiring entities, these sites are banks and other organizations that settle payment card transactions – that is, payments made through debit cards, credit cards and similar means.
PSEs must report these payments on information returns regardless of their amount; there is no de minimis exception. However, they report their aggregate payments for the calendar year; they do not report payments to each payee.
What to Expect with the New TPSO Information Reporting Threshold
A TPSO files its information returns on Form 1099-K, Payment Card and Third Party Network Transactions. The TPSO must also provide a copy of the return to the person who received the payments. Payees who receive more than $600 from a TPSO during 2022 should receive their 1099-K’s during January of 2023, so they can use the information when preparing their own tax returns. PSEs also report their payments on Form 1099-K and provide a copy to the payee.
Regardless of whether payments come from a TPSO or a PSE, the IRS will know about them and, if necessary, will adjust the taxpayer’s return to reflect them. Thus, only taxpayers who stay below a TPSO’s $600 reporting threshold will be able to leave their side-hustle income off their returns (inadvertently or otherwise).
How Should Taxpayers Prepare?
A payee who expects to receive more than $600 from a TPSO in 2022 can do two things now to lessen the tax bite in 2023.
Taxpayers should be prepared for the extra tax liability. A payee who does not earn wages should consider making quarterly estimated tax payments. If the payee fails to do so and the additional tax liability is at least $1,000, a federal underpayment penalty may apply. However, a payee who also earns wages in 2022 can avoid estimated taxes by increasing the amount of income tax withheld from wages.
Payees should immediately start keeping careful records of any expenses and losses that might decrease their taxable income from the TPSO. A payee who wasn’t especially careful to report all side hustle income probably also wasn’t especially careful to track expenses. But since most payees will no longer be able to ignore the income, they should make sure that any additional tax applies only to their profits, rather than their gross income, from their internet-based activities.
Backup Withholding
Taxpayers should also be prepared to share their identifying information, including their Taxpayer Identification Number (TIN), with the TPSO. An individual’s TIN is usually their Social Security Number, unless they also have an Employer Identification Number (EIN).
If the payee fails to give the TPSO a correct TIN, the TPSO must withhold 24% of its payments over the $600 reporting threshold. These withheld amounts are sent to the IRS and, like taxes withheld from wages, may be refunded if they exceed the payee’s income tax liability. But most payees would probably prefer not to have to wait for a refund.