Tips to Minimize Risk for Form 1099-K Reporting

Editor’s note: This blog was updated on November 27, 2023 

Update: Since this content was published, the IRS released additional guidance further delaying and making changes to the implementation of the lowered Form 1099-K reporting threshold for 2023 returns. Read our recent blog post for additional details about the latest Form 1099-K reporting threshold requirements.

Financial services and institutions, payment processors and gig economy companies are especially vulnerable to the increased risks that come with handling significantly more Forms 1099 due to new IRS 1099-K reporting regulations. If you are tasked with managing compliance or managing fraud for your organization, this burden may very well fall into your lap. It’s important to be proactive in safeguarding your organization from these new opportunities for the IRS to penalize your organization.  

IRS changes 1099-K reporting thresholds for gig companies and TPSOs

As a result of changes in section 9674 of The American Rescue Plan Act of 2021 (ARPA), gig platform companies and other Third-Party Settlement Organizations (TPSOs) will need to report significantly more Forms 1099-K Payment Card & Third Party Network Transactions for payments they make to recipients in 2023. Effective with returns filed in early 2024, TPSOs will need to file Form 1099-K when they paid a single recipient at least $600 or more during 2022. Previously, reporting was only required by these businesses when they paid a single recipient at least $20K during the calendar year and when those amounts were paid over at least 200 transactions.  

This threshold was originally set to go into effect for returns filed in early 2023, however the IRS delayed the implementation in Notice 2023-10 to returns filed in early 2024.

With a lower reporting threshold, organizations may have increased backup withholding tax obligations and an increased volume of 1099-K forms that will need to be issued and filed with government agencies. It will also increase the risk of IRS and state penalties. Over 25 states require direct state reporting of Form 1099-K, with several following the $600 threshold.

To minimize risk, organizations need to plan their tax reporting operations early on. Below are three tips to help you prepare your tax information for the 2023 filing season.

1. Clean up TIN information before you issue Forms 1099
   One of the most common mistakes the IRS will penalize you for is submitting Forms 1099 with missing or incorrect taxpayer identification number (TIN) information. To reduce the risk of making this mistake, take proactive measures to identify and remediate errors before the data is submitted to the IRS and states.  Compare the names and TINs that will be reported on Forms 1099 directly to the IRS database. This allows time to identify the errors and solicit new information from the payee before issuing and filing the 1099s. The IRS offers TIN matching solutions for matching business and individual TINs and names to their databases. Using this tool is important because while some solutions in the market may claim to validate TIN information, often it is not being compared directly to the IRS database and instead to other business sources of information. And if you receive a good match for a name and TIN combination using the IRS database, it may qualify you for a penalty abatement in the future.
2. Prioritize Form 1099-K state reporting
   Most states require businesses to submit Form 1099 information for their residents regardless of where the business is “doing business.” State tax reporting processes often do not align with the IRS requirements for the same income; resulting in different data filing formats, due dates and thresholds. Over the last few years, many states adopted direct state filing requirements for Form 1099-K that are at much lower thresholds and transaction limits.
3. Evaluate current reporting solutions, then fill in the gaps
   Technology is key to efficient tax information reporting. It automates the transformation of data into the different required filing formats for the states and the IRS and validates that data for accuracy and for delivering statements to the recipients. A common method to minimize costs and improve customer experience when delivering 1099s is to utilize electronic statements. Though the IRS has specific requirements for obtaining consent, maintaining the information and statement delivery, having an electronic statement process can reduce risks that come with printing and mailing private tax information to recipients.