If you use payment apps or online marketplaces, there's an important tax update you need to know about. The IRS has announced significant changes to the reporting thresholds for Form 1099-K, which could affect how you report income from third-party platforms. Whether you're a small business owner, freelancer, or someone who occasionally sells items online, these changes could have a direct impact on your tax obligations.
What's changing with Form 1099-K?
Form 1099-K is used by the IRS to track payments made through third-party settlement organizations (TPSOs). This includes popular platforms like PayPal, Venmo, eBay, Etsy, and other apps or websites that process payments between buyers and sellers.
The old thresholds
Previously, TPSOs were required to issue a Form 1099-K to individuals who received more than $20,000 in gross payments and over 200 transactions in a calendar year.
This meant that casual sellers or small-scale users often fell below the reporting requirements and didn't receive a 1099-K.
The new threshold
In 2023, the threshold for reporting transactions dramatically decreased due to the American Rescue Plan Act (ARPA). The Act required TPSOs to report transactions totaling more than $600, regardless of the number of transactions, but the full implementation of this provision has been delayed repeatedly.
What does this mean for taxpayers?
TPSOs will need to adjust their systems to track and report a larger volume of transactions. This includes collecting accurate taxpayer identification numbers (TINs) from users to ensure compliance with IRS reporting requirements.
Eventually, individual and business taxpayers who receive more than $600 through a TPSO in a calendar year should expect to receive a Form 1099-K. This form will report the gross amount of all reportable payment transactions, which you will need to include when filing your taxes.
Taxable income vs. personal transactions
It's important to distinguish between taxable income and non-taxable personal transactions. Taxable income includes payments received for goods and services sold, freelance work, gig economy jobs, and other income-generating activities. Non-taxable transactions typically include reimbursements from friends or family or payments for personal expenses.
Transition
On November 26, 2024, the IRS introduced a phased approach to lowering the reporting thresholds for TPSOs. For the calendar year 2024, TPSOs are required to report transactions when the total payments exceed $5,000. This threshold will decrease to more than $2,500 in 2025. Starting in 2026 and for all subsequent years, TPSOs must report transactions when total payments exceed $600.
Tips for navigating the new requirements
To prepare for and manage these changes, start by reviewing your activity on payment apps and online marketplaces. Check how much you've received to determine if you surpass the new reporting threshold of $5,000 for tax year 2024.
It's important to keep detailed records of all your transactions, clearly noting which are personal and which are related to business or income-generating activities. This documentation will be useful when it's time to report income and can help clarify any discrepancies.
If you're uncertain about how these changes affect your tax situation, reach out to our office. We can offer personalized advice and ensure you’re in compliance.