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UPDATE 2/20/2024: Read the NTA’s latest blogs on Form 1099-K and Gig Economy.
UPDATE 11/21/2023: IRS issues revised Form 1099-K reporting guidance and tax Fact Sheet.
On November 21, 2023, the IRS issued Notice 2023-74 delaying the requirement for third-party electronic payment networks to report transactions over $600 to the IRS on a Form 1099-K, Payment Card and Third Party Network Transactions, until 2025. The $20,000 and 200 transactions thresholds remain in place until December 31, 2023, and will then decrease to $5,000 for the 2024 tax year. Note: The rules for reporting income are not changing. Anybody receiving taxable income through third-party networks must still track and report their taxable income. Read the IRS’s news release for more details.
A Form 1099-K is an information form typically provided to freelancers or small business owners who receive payments of income from a client via a third-party payment system (e.g., Venmo, PayPal, or Cash App) and it is often considered self-employment income. However, with the convenience of Venmo, PayPal, or Cash App, many individuals pay personal expenses as well as payments associated with goods and services with these apps.
For example, think about a group of friends who regularly has lunch or dinner together and one person pays the bill. After the meal, the friends send reimbursement through Venmo. Unless the account or payment is designated as personal, it will trigger a reporting requirement if the annual amount exceeds $600. The person receiving the funds could receive a Form 1099-K, and the IRS will expect to see that income reported on his or her tax return. Payments incorrectly classified as business (goods or services) will trigger a Form 1099-K. If a taxpayer believes it is not taxable and does not include the amount on his or her tax return, it will create a mismatch with IRS systems potentially triggering an IRS notice of adjustments and penalties. If not taxable, taxpayers will be required to provide support as to why the payments should not be included in income. Lowering the threshold from $20,000 to $600 substantially increases the number of Forms 1099-K that will be issued. The postponement should provide taxpayers additional time to familiarize themselves with the rules and, more importantly, to properly identify personal versus business payments to prevent misidentified payments being reported on a Form 1099-K at year-end.
Companies such as Venmo, PayPal, and Cash App, known as Third-Party Settlement Organizations (TPSOs), are required to provide annual Forms 1099-K to the IRS and taxpayers. In March 2021, Congress modified the requirements for reporting these transactions by lowering the minimum reporting threshold to any amount over $600 for one or more transactions beginning in 2022. Prior to the change, companies were required to report transactions for a payee if (1) they exceeded $20,000 and (2) the number of transactions with that payee exceeded 200.
The Notice creates a transition period of one year, postponing the $600 Form 1099-K threshold until the January 31, 2024 reporting date. In essence, the IRS is taking the rules back to the pre-March 2021 threshold ($20,000 and 200 transactions) for any calendar year beginning before January 1, 2023. The lower reporting threshold (any number of transactions totaling $600) remains in effect for calendar years starting after December 31, 2022. This one-year delay does not apply to any of the other Form 1099-K rules not modified by the American Rescue Plan Act.
This comes in response to serious concerns expressed by the public regarding the ability to comply and taxpayer confusion on how to report Form 1099-K on income tax returns. With little guidance available to the public and a significant increase in the burden on the electronic payment networks, the IRS decided a transition period was necessary.
The IRS states it is aware of public concern about the ability of TPSOs to comply with the $600 Form 1099-K threshold. It also recognizes taxpayers are confused about how to report payments reflected on Forms 1099-K on their income tax returns. The Department of the Treasury, Office of Tax Policy, and the IRS have been receiving numerous calls and letters from the public and Congress about the Form 1099-K reporting changes.
I expect during this transition period the IRS will develop guidance and share information to assist taxpayers in complying with the new rules going forward.
It is important to note that this delay in the $600 Form 1099-K reporting requirements does not change the rules regarding taxability of income. As before, taxpayers must report all income on their tax return, whether they received a Form 1099 or not. Taxpayers should continue to track and report their taxable income from all sources electronic and nonelectronic.
When using electronic payment systems, such as PayPal, Venmo, and Cash App, make sure personal payments like gifts or reimbursements to friends are properly classified as an amount paid for something other than goods or services. Many TPSOs suggest creating a separate personal and business profile/account to keep business transactions separate from nontaxable personal transactions. Incorrectly classifying personal amounts as business may trigger receiving a Form 1099-K and cause issues when filing your annual tax return.
The IRS has additional guidance at:
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.