IRS Form 1099-K Threshold is Delayed Again
The $600 threshold for Form 1099-K reporting for third-party settlement organizations (TPSOs) has been delayed again. The IRS made the announcement on November 26th with the issuance of Notice 2024-85. This change means that TPSOs will only be required to report transactions when the total payment amounts exceed $5,000 in 2024, more than $2,500 in 2025, and more than $600 in 2026 and beyond. It was also announced the agency would not assess penalties for 2024 for failure to withhold or pay back up withholding during the calendar year. To help clients, prospects, and others, Klatzkin has provided a summary of the key details below.
1099-K Basics
Form 1099-K, also known as Payment Card and Third-Party Network Transactions, is a form taxpayers can get when they receive payments from third-party online marketplaces, payment apps, gift cards, debit cards, credit cards, or other cards with stored value. Any payments above the threshold set each year will mean a taxpayer can expect to receive a 1099-K. If the recipient of the payments realizes a gain, they may have a tax obligation. Reporting applies to the payments a taxpayer received, but not to purchases they made.
It’s also important to note that taxpayers are responsible for reporting received payments on their tax returns, regardless of whether they receive a 1099-K from a TPSO. Any income received through payments eligible for 1099-K reporting, as well as cash, property, and service payments, need to be reported. Some
organizations may still choose to send out reports if the payee doesn’t meet the threshold.
New 1099-K Threshold and Delays
Before the American Rescue Plan (ARPA) of 2021, TPSOs were not required to file Form 1099-K for payees who had under 200 transactions and $20,000 in aggregate sales. ARPA set the threshold at $600, with no minimum transactions required, starting with calendar year 2022. This $600 threshold was delayed in 2022 and again in 2023, with a $5,000 threshold planned for tax year 2024 to start to ease into this change.
In this new notice, the IRS announced that 2024 and 2025 will be treated as transition years. As mentioned above, TPSOs will be expected to report payments for transactions that total over $5,000 in calendar year 2024, $2,500 in 2025, and $600 in 2026. The threshold will be set at $600 moving forward from there.
While this doesn’t change the $5,000 threshold planned in calendar year 2024, it does allow for additional transition time and a higher threshold in 2025 than had been previously announced.
Why is There Another Delay?
With a longer transition period, the IRS hopes that it will ease the burden associated with TPSOs being required to comply with Sec. 6050W(e), a regulation governing TPSO payment reporting requirements on Form 1099-K. It also creates a transition period for the IRS, which is estimated to receive more than three times the forms it received in 2023 – likely increasing from 14 million to 44 million.
What Else Should TPSOs Know?
Per Notice 2024-85, TPSOs that fail to withhold and pay backup withholding tax during the calendar year will not be subject to penalties by the IRS. For calendar year 2024, TPSOs that conducted backup withholding for a payee will file a Form 945 and Form 1099-K with the IRS, providing a copy to the payee. Starting in the calendar year 2025 and beyond, TPSOs may be subject to penalties under Section 6651 or 6656 if they fail to withhold or pay backup withholding tax.
What Should Taxpayers Do if They Receive a 1099-K?
Anyone can receive a 1099-K if they receive payments through the previously mentioned avenues. They need to be able to verify the information reported is correct and adjust as necessary before reporting. Not all payments will be taxable, however. For example, selling personal items at a loss is not a taxable event because the taxpayer has not gained anything from the sale. Payments from family and friends shouldn’t trigger a reporting requirement. Crowdfunded money is sometimes considered taxable and is other times considered a non-taxable gift. If a taxpayer has questions or wants to see revisions to a 1099-K they received, they can contact the report filer or the payment settlement entity (PSE) to sort things out.
What Else Should Taxpayers Know?
It doesn’t matter whether a taxpayer receives a 1099-K or not when it comes to reporting earned income. All income earned from goods and services needs to be accounted for. If a taxpayer is selling items at a loss, it’s also useful to have documentation of the original purpose price to improve filing accuracy and decrease tax burdens. However, losses in one sale do not cancel out gains in another. Losses need to be reported on Form 1040, Schedule 1, Part I – Line 8z, and Part 11, Line 24z, to cover the sales price and purchase price of the item. Gains should be reported on Form 8949 and Schedule D.
Contact Us
The recently announced delay provides additional time to come into compliance with IRS requirements. TPSOs should carefully review the IRS Notice to ensure compliance with the updated deadlines. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Klatzkin can help. For additional information call 609-890-9189 or click here to contact us. We look forward to speaking with you soon.