Merchant Risk Live Wrap-up: Wendy Walker On 1099 Changes To Know About

Many businesses in payments are scrambling to understand the new change created by the Internal Revenue Service for the 1099 form. In this episode of Merchant Risk Live, Wendy Walker, Solution Principal of Tax Information Reporting at Sovos, helps payment service providers understand how the new rule impacts them.

Leveraging more than a decade of industry experience as well as serving as the chair of the information reporting subgroup to the IRS advisory council, Wendy advocates for improvements in tax administration with the members of the IRS as well as state tax authorities.

Read the key takeaways of our chat after the image, or watch the full video.

Understanding 1099 Form

The 1099 form is a collection of documents that report the various types of payments people may receive other than the standard salaries and paychecks a business might pay. Previously there were no threshold requirements, which made it so that one set of payers followed the threshold set by the IRS, while payment card transactions required reporting on every single transaction. To create a standard playing field, the IRS began with evaluating and bringing change to the 1099 form.

1099 form reports the payment card and third-party network transactions to the IRS. According to Wendy, payment card transactions — whether they are credit cards, debit or gift cards, or any transaction done via a payment card — are liable for the 1099 form. The criteria that constitute a third-party transaction are a bit different. Generally, third-party payments are agreements or arrangements between a network of merchants or providers that agree on a third party to settle a transaction. For example, companies like Uber, PayPal, or DoorDash count as third-party payments since these companies have workers that are agreeing to payment via a third-party network.

Who Should Be Filing the Form and What Is Changing in 2022

Wendy said that the party responsible for reporting the 1099-K should be the same party that submits the instructions to transfer funds to the account of the participating payee. To better understand this, she provided an example of the ride-sharing app Uber. In Uber's case, whoever submits the instructions that actually move the funds into the driver's account initiates the ACH transaction, and therefore is the party that is required to report this form.

Wendy said there are often misunderstandings about who is responsible for filing the form. In the event two parties are fully involved in the process, one is required to defer to the other so that it is clear who is responsible for the obligation in order to avoid double reporting. For different entities such as independent contractors, companies are usually the ones expected to fill in the reporting on the contractor's behalf unless they have deferred their responsibility legally.

Understanding the Consequences and Penalties For Misfiling

When an entity issues something incorrectly, Wendy said there is a penalty structure. But if the entity files a correction and pulls back that information, it generally will avoid a penalty. Wendy said a problem arises when entities intentionally disregard the rules.

Penalties are applicable to all 1099 information returns and are typically issued every year in August, two years after the tax information has been filed. Those who have misfiled have a chance to explain and cite why they may not be liable for the penalties. The form is a proposed penalty, not a final assessment.

If corrections are required, Wendy said the IRS typically sends out a form that highlights the mismatch, and people usually have 15 days to submit the form. To proactively avoid this as well as the fee that comes with it, Wendy recommended working through a 1099 matching program to make sure everything looks correct when onboarding a payee.

Want to join us live?

The Merchant Risk Live is a biweekly virtual event to discuss trends in merchant risk management with guest experts in payments risk and compliance. Some of the topics include creating effective risk rules, making transaction monitoring and content monitoring work together, getting federal regulation updates, and more! If you’re interested in joining the biweekly live event, sign up today.