The Internal Revenue Service (IRS) has introduced a phased approach to the implementation of new reporting thresholds for third-party settlement organizations (TPSOs), such as payment apps and online marketplaces. This strategy aims to facilitate a smoother transition for both TPSOs and taxpayers.
Background on Form 1099-K Reporting
Form 1099-K, titled “Payment Card and Third Party Network Transactions,” is utilized by TPSOs to report payment transactions to both the IRS and the participating payees.
Historically, the reporting threshold required TPSOs to issue a Form 1099-K if a payee’s transactions exceeded $20,000 in gross payments and surpassed 200 transactions within a calendar year.
Changes Introduced by the American Rescue Plan Act of 2021
The American Rescue Plan Act of 2021 significantly amended the reporting requirements by reducing the threshold to $600 in aggregate payments, irrespective of the number of transactions. This change was initially set to take effect for transactions occurring in 2022.
IRS Transition Relief and Phased Implementation
Recognizing the challenges associated with this abrupt change, the IRS has provided transition relief through Notice 2024-85. The phased implementation schedule is as follows:
| Calendar Year | Reporting Threshold | Backup Withholding Penalties |
|---|---|---|
| 2024 | $5,000 | Not enforced |
| 2025 | $2,500 | Enforced |
| 2026 onwards | $600 | Enforced |
Implications for Third-Party Settlement Organizations
For the calendar year 2024, TPSOs are required to report transactions exceeding $5,000 in total payments to a single payee, regardless of the number of transactions. During this year, the IRS will not impose penalties under sections 6651 or 6656 for a TPSO’s failure to withhold and pay backup withholding tax.
However, if a TPSO does perform backup withholding for a payee in 2024, it must file Form 945 and Form 1099-K with the IRS and provide a copy to the payee.
In 2025, the reporting threshold decreases to $2,500. The IRS will begin enforcing penalties for failures related to backup withholding tax. From 2026 onwards, the threshold will be set at $600, aligning with the original amendment introduced by the American Rescue Plan Act.
Rationale Behind the Phased Approach
The IRS’s decision to implement a phased approach stems from concerns about the administrative burden on TPSOs and the potential confusion among taxpayers. By gradually lowering the reporting thresholds, the IRS aims to provide sufficient time for all parties to adapt to the new requirements, ensuring a smoother transition and enhancing compliance.
Impact on Taxpayers
Taxpayers utilizing third-party payment platforms should be aware of these changing thresholds. As the thresholds decrease, more individuals may receive Form 1099-K, which reports income to the IRS.
It’s crucial for taxpayers to maintain accurate records of all transactions conducted through these platforms to ensure proper income reporting and tax compliance.
Conclusion
The IRS’s phased implementation of the new Form 1099-K reporting thresholds reflects a balanced approach to modernizing tax reporting requirements while considering the operational capacities of TPSOs and the informational needs of taxpayers.
Staying informed about these changes is essential for both TPSOs and taxpayers to ensure compliance and avoid potential penalties.
What is Form 1099-K?
Form 1099-K is used by third-party settlement organizations to report payment transactions to the IRS and payees. It details the gross amount of all reportable payment transactions within a calendar year.
How have the reporting thresholds changed?
The reporting thresholds are being phased in as follows: $5,000 in 2024, $2,500 in 2025, and $600 from 2026 onwards.
What are the implications for taxpayers receiving Form 1099-K?
Taxpayers receiving Form 1099-K must report the income on their tax returns. It’s important to maintain accurate records of transactions to ensure correct income reporting and tax compliance.
