Third-party settlement organizations are required to report payments made within a trade or business to both the IRS and recipients using the 1099 Form. Examples of third-party settlement organizations include Venmo, PayPal, Uber, and Etsy. Third-party settlement company, program, or application is required to file a 1099-K if a business’s transactions exceed the specified dollar threshold. The American Rescue Plan Act of 2021 brought about a significant reduction in the threshold for filing Form 1099-K, lowering it to $600 from the previous threshold of $20,000 and over 200 transactions. Due to the substantial nature of this change, the IRS has postponed the implementation of the $600 threshold until the 2023 tax year.
The IRS has set the $600 threshold implementation for the year 2025. In order to facilitate a smoother transition for taxpayers, the IRS is proposing a $5,000 threshold for the 2024 tax year. This phased approach aims to provide taxpayers with ample time to plan and prepare for the forthcoming changes.
Reason for Delay
The delay in implementing the $600 threshold stems from the IRS’s consideration of potential confusion and unintended consequences. The IRS estimates that approximately 44 million 1099-Ks would have been issued to taxpayers who might not have anticipated receiving one if the $600 threshold had been enforced in 2023. Many of these recipients may not have had a tax obligation, leading to significant confusion and potential complications in compliance. This delay is a precautionary measure to avoid unnecessary challenges and ensure a more seamless transition for businesses and taxpayers affected by the threshold change.
Who is Affected?
The 1099-K reporting requirements specifically relate to the sale of goods and services, covering transactions such as the sale of used personal items, regardless of whether the seller incurs a tax liability from these sales. It’s important to note personal transactions, such as exchanging holiday gifts or reimbursing someone for a household bill, are exempt from these reporting requirements. In essence, the reporting obligations are tied to business-related sales and services rather than personal, non-commercial transactions.
Certain members of Congress have introduced bills aiming to revert the threshold back to $20,000 and more than 200 transactions, though the passage of these proposals remains uncertain. In anticipation of the 2024 tax year, businesses are encouraged to proactively strategize to minimize the tax implications associated with Form 1099-K reportable payments. Taxpayers should conduct a comprehensive review of gig and other reportable activities to guarantee accurate recording of payments. Considering potential changes, it might be beneficial to adjust tax withholding or make estimated tax payments to sidestep penalties and navigate any evolving tax landscape effectively.