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Concerned about the confusing 1099-K reporting requirements? You can breathe a sigh of relief. The IRS recently delayed the new $600 threshold for 2023 and plans a lower-than-expected increase for 2024. Here’s a breakdown of what third-party settlement organizations and individual taxpayers need to know.

Changes to the Reporting Threshold

Third-party settlement organizations must report payments in a trade or business to the IRS and recipients. This is done on Form 1099-K, “Payment Card and Third-Party Network Transactions.” Examples of third-party settlement organizations include Venmo and Cash App, as well as gig economy facilitators, such as Uber, Lyft, Etsy, and TaskRabbit.

The American Rescue Plan of 2021 introduced a new, lower threshold ($600 down from $20,000) for third-party settlement organizations (TPSOs) like payment apps and online marketplaces to issue Form 1099-K reports. This meant they would have to send the form to any user who received more than $600 in payments and had more than 200 transactions in a year (starting in 2022), potentially generating many unnecessary reports and causing confusion. In late 2022, the IRS temporarily delayed the reduced threshold for the 2022 tax year.

Following additional feedback from taxpayers, tax professionals and payment processors, it’s been delayed again for 2023, and the IRS is planning for a threshold of $5,000 for 2024. This will give taxpayers more time to prepare their systems and procedures for when the $600 1099-K threshold is scheduled to go into effect in 2025.

What should you do?

• Businesses: Continue using the current $20,000 and 200 transaction threshold for 2023. Stay informed about the final 2024 threshold and update your reporting processes if necessary.
• Individuals: Keep track of your income regardless of 1099-K reports and monitor IRS updates for the final 2024 threshold.

“Taking this phased-in approach is the right thing to do for the purposes of tax administration, and it prevents unnecessary confusion as we continue to look at changes to Form 1040. It’s clear that an additional delay for tax year 2023 will avoid problems for taxpayers, tax professionals and others in this area,” said IRS Commissioner Danny Werfel.

Looking Ahead

The lower threshold for filing 1099-K forms will mean many participants in the gig economy will receive these forms for the first time. The IRS estimates that the reduced threshold, if it had gone into effect in 2023, would have resulted in the distribution of 44 million 1099-Ks sent to many taxpayers who wouldn’t expect one and might not have a tax obligation. This could have caused significant confusion among individuals and businesses.

Important

The 1099-K reporting requirements don’t apply to personal transactions, such as birthday or holiday gifts, sharing the cost of a car ride or meal, or paying a family member or another person for a household bill. These payments aren’t taxable and don’t require 1099-Ks. However, the sale of goods and services, including selling used personal items — such as clothing, furniture and other household items — could generate a Form 1099-K for many people, even if the seller doesn’t have a tax liability from those sales.

Bills to raise the threshold back to $20,000 and 200 transactions have been introduced by members of Congress, but there’s no guarantee these bills will pass. In addition, taxpayers should generally be reporting income from their side employment gigs, whether it’s reported to the IRS or not. For example, if you’re a freelancer making money selling products on Etsy or driving for Uber, you should have been paying taxes all along. But the IRS and Congress have stated this responsibility is often ignored. Some taxpayers might not be aware these income sources are taxable.

Tips for Businesses

Proactive tax minimization: As the 2024 Form 1099-K threshold details become finalized, businesses should adopt strategies to minimize the potential tax impact of reporting the gross amount of payable transactions. This may involve optimizing payment structures, leveraging relevant tax deductions, and consulting with tax professionals for tailored advice.

Accurate recordkeeping: Maintaining meticulous records of all transactions and reportable payments remains crucial for businesses to ensure compliance and facilitate accurate reporting come tax season.

Tips for Individual Taxpayers

Individuals engaged in gig work or other reportable activities should closely review their transactions for the year to ensure all income is accurately recorded, regardless of whether they receive a 1099-K form. Proper documentation will simplify tax preparation and avoid potential discrepancies. If you receive income from any trade or business, including gig work, you’re responsible for reporting the full amount on your tax returns. If you receive income from certain activities, you may want to increase your tax withholding or, if necessary, make estimated tax payments or larger payments to avoid penalties.

Taxpayers who haven’t been reporting all gig work income may not have been documenting expenses that result in deductions. Doing so now can minimize the taxable income recognized due to the gross receipts reported on Form 1099-K. The IRS is likely to take the position that all of a taxpayer’s gross receipts reported on Form 1099-K are income and won’t allow deductions unless the taxpayer substantiates them. Deductions will vary based on the nature of the taxpayer’s work.

For More Information

The expanded 1099-K reporting requirement is complex and will affect many businesses and individuals. “The IRS will use this additional time to continue carefully crafting a way forward to minimize burden,” said Commissioner Werfel.