The American Rescue Plan Act of 2021 (the Act) significantly modifies the reporting threshold associated with Form 1099-K, Payment Card and Third Party Network Transactions, from $20,000 in aggregate payments and 200 transactions to solely a threshold of $600 in aggregate payments (with no minimum transaction requirement). The new rule is effective beginning with payment transactions settled after December 31, 2021.
This change affects entities that settle payment transactions through a third-party payment network. These types of arrangements typically involve online payment platforms, marketplaces, or internet payment service providers. In addition, the Act clarifies that third-party network transactions include only transactions for the provision of ‘goods or services.’ As a result, personal gifts, charitable contributions, and reimbursements are not included.
Action item: In light of the lowered Form 1099-K reporting threshold under the Act, third-party settlement organizations (TPSOs) may need to modify existing processes to timely obtain a participating payee’s taxpayer identification number (TIN). Failure to do so could trigger backup withholding obligations.
The Act will significantly increase the number of Forms 1099-K that TPSOs will be required to file in a given year. The legislative history clarifies what constitutes ‘goods and services’ and that organizations that do not facilitate commercial activities do not have an obligation to report. However, the reduction in the reporting threshold will affect the onboarding practices of many TPSOs, specifically the process for collecting TINS that previously were based on higher thresholds. Failure to recognize the need for collecting TINs earlier in the TPSO relationship could expose organizations to excessive backup withholding obligations or liability if proper information is not obtained or the withholding is missed.
Partner, PwC US