In the last week, we’ve been inundated with questions about the 600 pound . . . errr, I mean dollar, elephant in the room. As the pandemic presses on our business, it can be scary to find out our business is facing major changes, but we’re here to help alleviate that stress.
First – There are two rules involving the $600 on the table. This has caused mass confusion as many believe there is only one rule.
Rule 1: American Rescue Plan Act of 2021: (Pub L. No. 117-2) – Begins 2022
A provision within the American Rescue Plan Act of 2021 – the COVID Stimulus as we like to call it – changed the way your payment processors (i.e., Paypal, Stripe, etc.) are required to report businesses who process more than $600.
Prior to this change, the payment processors were not required to report payments unless they were over $20,000 or 200 per year. Example: In 2020, if Betty pays affiliates a total of over $20,000 for selling items on her website, Paypal would automatically send a 1099 to the affiliate. Under the new rule, the payment processor is required to report any affiliates that Betty paid $600 or more.
The reality is this – If you paid anyone through your business, you were always required to send a 1099. This should actually simplify your bookkeeping, because now, the payment processor will handle the 1099 for any payments over $600.
This new plan is estimated to bring in $8 billion over the next 10 years in additional business tax revenue.
Rule 2: President Biden Plan: Proposed
The current administration is proposing a new rule which would require banks to report to the Internal Revenue Service (IRS) transactions over $600. The goal was to crack down on tax cheating and raise more revenue. Since the initial proposal, the Democrats have gone back to the table and are expected to come back with a much higher number (rumored to be in the $10,000 range.)
What does this mean to you? To put it simply – be sure you are already following the required 1099 protocol for payments from your business to other vendors, companies, affiliates, etc. If payment processors also send out the 1099, grab yourself a cup of coffee and enjoy having one more part of your business handled.