To say the internet has changed how businesses interact with individuals—whether as consumers, independent contractors or by facilitating interactions between individuals—is an understatement. Payment platforms, like Dwolla, help businesses simplify payments.
As the landscape of payments has changed, both the Internal Revenue Service (IRS) and state legislatures have taken notice and implemented reporting requirements for credit card and payment companies to capture this data and encourage voluntary tax compliance.
A brief history of the Federal Form 1099-K
The primary purpose of the Housing Tax Assistance Tax Act of 2008 is to provide housing reform. But as with many laws, other requirements were added to the final bill—including the requirement for credit card and third party settlement organizations (TPSO) to report certain payments to the IRS beginning in early 2012 for the 2011 tax year.
The TPSO reporting threshold for the federal 1099-K is over 200 payments received for the sale of goods or services during the calendar year totalling $20,000 or more.
States are starting to take notice
Many states also require that TPSOs file 1099-Ks with the state taxing authorities but the reporting thresholds are exactly the same as the federal threshold. In 2017, two states, Massachusetts and Vermont, passed legislation that significantly lowered the reporting threshold.
The reporting threshold in both states is $600 of gross payments received in the calendar year irrespective of the number of transactions.
Applying the rules to Dwolla-supported payment flows
It is important to remember that since the IRS and states are targeting voluntary compliance on income reporting, Dwolla is required to report on gross payments received by users.
Here are a few examples:
Sending payments to users
Acme Company pays out independent contractors. Independent contractor Mary received 201 payments over the course of the year totalling $210,000. Mary would receive a Form 1099-K from Dwolla. Acme Company would not receive a Form 1099-K for the payments it sent to Mary.
Independent contractor John received 199 payments over the course of the year that totalled $210,000. Neither he—nor Acme Company—would receive a Form 1099-K from Dwolla.
Receiving payments from users
The XYZ Company sells widgets to consumers and collects payments via Dwolla. Over the course of the year, it collected 20,000 payments totalling $500,000. The XYZ Company would receive a Form 1099-K from Dwolla. The consumers who purchased the widgets would not receive a Form 1099-K for their payments through Dwolla.
Facilitating payments between users
ABC Property Management facilitates rental agreements and rent payments between landlords and tenants. Landlord A had 20 properties that were rented for $1,000 per month and used the property management platform for the entire calendar year.
At the end of the calendar year the landlord would receive a Form 1099-K from Dwolla reporting 240 gross payments received (20 properties x 12 months of rent each) totalling $240,000. The individual tenants would not receive a Form 1099-K as they sent, rather than received, the payments.
Landlord B had 10 properties that were rented for $1,000 per month and used the property management platform for the entire calendar year. The landlord is located in Massachusetts.
At the end of the calendar year, the landlord would not receive a federal Form 1099-K from Dwolla as only 120 gross payments were received (10 properties x 12 months of rent each) and totalled $120,000. However, the landlord would receive a Massachusetts Form 1099-K as the gross payments received exceeded $600.
Similar to the previous example, the individual tenants would not receive a 1099-K for their payments through Dwolla.
I or my users received a Form 1099-K from Dwolla. Now what?
Both the federal and state Form 1099-Ks are information returns and the gross payments reported on a Form 1099-K do not necessarily represent reportable income. The form should be used in conjunction with other tax records (bank statements, invoices, etc.) to determine you or your users’ taxable income.
The only tax form issued by Dwolla to users on our platform is the Form 1099-K.
Please consult your tax advisor to determine whether any additional tax reporting may be required of your specific business model.