1099K Reporting Threshold Delayed Once More

Taxpayers who received over $5,000 in payments for goods or services through third-party networks during the 2024 tax year should expect to receive a Form 1099-K in early 2025. Also, taxpayers should note that the Form 1099-K threshold of $2,500 is currently in effect for the 2025 tax year. 

The Internal Revenue Service (IRS) has announced a delay in the implementation of the new $600 threshold for 1099-K reporting, which would apply to third-party settlement organizations (TPSOs), including payment settlement companies such as PayPal and Venmo. The new threshold was set to go into effect for transactions occurring in 2024, but the IRS has now stated that 2024 and 2025 will be considered transition years. Therefore, TPSOs will not be penalized for failing to comply with the $600 threshold during these two years.

As outlined in IRS Notice 2024-85, a third-party settlement organization (TPSO) is obligated to report payments made through third-party networks. This reporting requirement applies when the total payments for these transactions surpass $5,000 in 2024, $2,500 in 2025 and $600 in 2026 as well as subsequent years.

What is 1099-K reporting?

Form 1099-K is used to report payments made to a taxpayer in the course of a trade or business, which typically come from third-party network transactions, which are reported to the IRS by the TPSO. Prior to the recent change, TPSOs were only required to file a 1099-K for payments exceeding $20,000 in a year with over 200 transactions. As such, most businesses did not receive a 1099-K since they rarely met the minimum transaction limit. However, the significantly lowered threshold of $600 will impact many taxpaying businesses, including independent contractors and payment settlement companies. The change is also expected to significantly increase tax revenue as well as increase transparency for underreported income.

Reasons for the Delay

The IRS’s decision to delay the implementation of the new $600 threshold is likely due to concerns raised by various stakeholders, including the American Institute of Certified Public Accountants (AICPA). The AICPA, along with other tax professional organizations, has expressed concerns that the lower threshold would create a significant burden for both taxpayers and TPSOs, such as an increase in paperwork and potential errors in reporting.

The AICPA’s Stance

The AICPA has been a vocal advocate for a more balanced approach to 1099-K reporting. In a letter of support for the Brown-Cassidy 1099-K Bill, the AICPA argued that the current $20,000 threshold with a 200-transaction requirement is a more reasonable approach, since the threshold creates better balance between the need to collect taxes and the administrative burden on taxpayers and TPSOs.

The AICPA also raised concerns about the potential for inaccurate reporting under the lower threshold. With a large number of low-value transactions being reported, there is a greater chance of errors. This could lead to confusion for taxpayers and additional work for tax professionals who would need to sort through inaccurate data.

What to Expect

The IRS’s delay in implementing the new $600 threshold provides some relief for taxpayers and TPSOs in the short term. However, it is important to note that this is only a temporary measure. The IRS has indicated that they are still committed to lowering the reporting threshold in the future. It is likely that they will continue to work with stakeholders to develop a more workable solution.

Many small businesses rely on third-party payment platforms to conduct their transactions. A lower reporting threshold could create a significant administrative burden for these businesses, especially those that process a high volume of low-value transactions. Businesses that rely on third-party payment platforms should prepare for more volume in reporting and discuss with their financial advisor how best to remain ahead of compliance requirements.

For questions or more information about 1099-K reporting requirements, contact your Windham Brannon advisor today, or reach out to Gary Gruner.