IRS Updates 1099-K Threshold Guidelines for Third-Party Payments

The IRS has updated the 1099-K threshold guidelines for third-party payments.
The Internal Revenue Service (IRS) has a phased approach in adapting the new reporting thresholds for 1099-K to third-party settlement organizations (TPSOs) such as payment applications and online marketplaces. This strategy would make it easier for taxpayers and TPSOs.
Form 1099-K, called “Payment Card and Third Party Network Transactions,” is used by TPSO for reporting payment transactions to IRS and payee by various payees.

Old Threshold for Reporting

Old reporting required for TPSOs to issue a 1099-K form if the payee had transaction amounts above $20,000 gross payments and more than 200 transactions during the calendar year.

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The major revision has been thrust in reporting requirement because of which the threshold has been reduced from $20000 to $600 in aggregate payments irrespective of the number of the transaction. This, however, was meant to be operative for transactions that would set the pattern in 2022.

IRS Transition Relief and Phased Implementation

Realizing the extremities of the abrupt change, the relief was provided as transition relief under Notice 2024-85 from IRS. The following is the phased implementation schedule:

Calendar Year	Reporting Threshold	Backup Withholding Penalties
2024	$5,000	Not enforced
2025	$2,500	Enforced
2026 onwards	$600	Enforced

Guidelines for the year 2024

TPSOs must report transactions over $5,000 for one payee.
In this year, no penalty shall be imposed by the IRS upon a TPSO for undeducted backup withholding tax.
However, if a TPSO engages in backup withholding during 2024, it is required to file Form 945 and Form 1099-K with the IRS and issue a copy to the payee entity.

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Guidelines for 2025 and 2026

In the year 2025, the threshold for reporting will be pegged at $2,500.
The period after 2026 shall set it at $600, which is the original amendment introduced by the American Rescue Plan Act.

Reason Behind the Phased Approach.

The IRS put up such an implementation because of its worry for the administrative burden the third-party settlement organization would experience, together with possible ambiguity among taxpayers. Through gradually lowering the thresholds, the Internal Revenue Service plans to allow for even longer adjustment periods for all involved parties to the new requirements and thus easier transitions while enhancing compliance.

Impact on Taxpayers

These are some of the new thresholds that should be noted by the taxpayers using third party payment platforms. As the threshold reduces, more forms 1099-K will be issued to individuals declaring their income to the IRS.

The Importance of Accurate Record-Keeping.
Every transaction must be recorded correctly.
Thus, it will ensure proper income reporting and undo any problem regarding the tax.

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Conclusion

The IRS’s gradual rollout of the new 1099-K reporting thresholds is a balanced approach in modernization of tax reporting requirements with the operational capacities of TPSOs and the information needs of taxpayers.
Keeping track of these changes is important for compliance and possible penalties.

FAQs

Q.1 What is Form 1099-K?

A.1 This one is very simple: Form 1099-K is a tax form that if payment apps, online marketplaces, and a myriad of third-party settlement organizations (TPSOs) decide to use, they must have it filed to the IRS and payees. This is to monitor transactions paid by individuals using these platforms.

Q.2 Why the IRS Updated 1099-K Reporting Thresholds?

A.2 The IRS updated the thresholds to improve tax reporting and compliance regarding income reporting from third-party payment platforms. This would ultimately capture more unrecorded transactions under the new thresholds.

Q.3 What are the new reporting thresholds regarding 1099-K?

A.3 For 2024, the threshold becomes $5,000 in total payments to a single payee regardless of the number of transactions. In 2025, the threshold will drop down to $2,500. Beginning in 2026, the threshold will be set at $600, as originally amended in the American Rescue Plan Act.

Q.4 What does the new 1099-K reporting threshold affect?

A.4 Thus, the new 1099-K reporting threshold would require TPSOs to report payments to IRS and payees if their payments cross the threshold. Taxpayers who receive these amounts should correctly report the income on their tax returns.