This blog was last updated on November 25, 2024
As tax year 2024 approaches, third-party settlement organizations (TPSOs) are keeping a close watch on IRS guidance regarding their obligations under the IRS’s Form 1099-K reporting requirements. Recent changes to the 1099-K reporting threshold, coupled with delayed enforcement and conflicting guidance, have left many TPSOs uncertain about their responsibilities.
At the heart of the uncertainty is the question: When will taxpayers receive a Form 1099-K, and under what circumstances are TPSOs required to send one? For those seeking clarity, this article delves into the nuances of Form 1099-K reporting. We’ll break down the current 1099-K reporting threshold, explore the difference between official and unofficial guidance, and provide actionable insights for TPSOs preparing for the upcoming tax season.
What is the threshold for 1099-K reporting?
Under Section 6050W of the Internal Revenue Code, TPSOs must report payments when a payee’s transactions total $600 or more in a calendar year, regardless of the number of transactions. This change, introduced by congress in the American Rescue Plan Act of 2021, marked a significant shift from the previous threshold of $20,000 and 200 transactions, drastically increasing the number of individuals and businesses subject to reporting.
The lowered threshold aimed to ensure reporting of income generated through online marketplaces and payment apps, such as PayPal, Venmo, and eBay, ensuring that these taxpayers report and pay over income taxes as required. However, the IRS delayed enforcement of the $600 reporting threshold for tax years 2022 and 2023, citing the need for a smoother transition for both TPSOs and taxpayers.
What is the threshold for filing a 1099-K in 2025?
In a news release dated November 2023, the IRS hinted at the possibility of a transition reporting threshold to $5,000 for tax year 2024, though this remains unconfirmed. This lack of formal guidance has created a challenging environment for TPSOs, who are unsure whether to prepare statements and files for reporting a $600 threshold, a $5,000 threshold, or even a return to the legacy $20,000 and 200 transactions rule.
Currently, conflicting information from the IRS adds to the confusion:
- Form 1099-K FAQs on the IRS website still reference the $20,000 and 200 transaction threshold, suggesting that the legacy rules remain in place.
- 2024 Form 1099-K Instructions for filers, however, explicitly state that reporting is required for transactions totaling $600 or more.
Why the Confusion? Conflicting Guidance on Form 1099-K
To understand the implications of the current situation, it’s important to differentiate between official and unofficial IRS guidance. In its role in administering the tax law enacted by Congress, the IRS must translate the laws into detailed requirements. These documents—regulations, revenue rulings, revenue procedures, notices, etc.—undergo thorough review processes, are legally binding, and can be relied upon by taxpayers and organizations for compliance.
Unofficial guidance, however, consists of FAQs, form instructions, news releases, and IRS publications. While these resources are designed to assist taxpayers, they are not legally binding. The National Taxpayer Advocate (NTA) has criticized this reliance on unofficial guidance, emphasizing that it can change without notice and cannot be used as a definitive basis for compliance.
It’s also important to note that Form 1099-K reporting isn’t solely governed by federal thresholds. State reporting requirements for Form 1099-K introduce an additional layer of complexity, as many states have their own unique thresholds and rules. While some states align with the federal threshold, others specify requirements specifically for TPSOs. This means that TPSOs operating across multiple states must not only navigate federal uncertainty but also ensure compliance with varying state thresholds.
TPSOs: Preparing for Tax Year 2024 Reporting
As intermediaries in countless financial transactions, TPSOs must balance regulatory responsibilities with operational efficiency. However, the lack of formal IRS confirmation regarding the reporting threshold makes this anything but simple.
With the IRS yet to issue clear guidance, TPSOs should adopt a cautious and proactive approach to minimize risks. Here are some actionable steps:
- Monitor IRS Updates: Regularly check the IRS website for official notices or other binding guidance confirming the reporting threshold for tax year 2024. You can also sign up for our newsletter to get the latest insights on tax compliance and information reporting.
- Plan for the $600 Threshold: Since the law requires TPSOs to report at the $600 threshold, TPSOs should be prepared to report payments under this rule. Still, meeting the $600 threshold (or any future changes) means potentially issuing thousands more forms. This may require scaling up systems and processes to handle the increased workloads. TPSOs that invest in automation and advanced reporting tools now will position themselves to handle increased demand with ease.
- Communicate with Platform Users: In today’s digital economy, trust is a currency as valuable as money. TPSOs should inform their users—whether small business owners, freelancers, or casual sellers—of the reporting requirements and potential 1099-K issuance, especially given the uncertainty around thresholds. By fostering transparency, they can help users understand the implications of income on their tax return and avoid filing issues.
- Consult Tax Professionals: Consulting a tax professional can help ensure compliance with the latest IRS guidance. Tax advisors can assist in reconciling conflicting instructions and advise on accurately filing income from Form 1099-K transactions.
While the evolving regulatory landscape presents challenges, it also offers an opportunity for TPSOs to strengthen their compliance infrastructure, build trust with users, and streamline their operations. Proactivity today ensures readiness for tomorrow’s tax obligations, no matter what threshold the IRS ultimately decides.
The Takeaway
While these changes might seem like just another layer of tax compliance, they reflect a broader shift toward greater transparency. Whether the 2024 reporting threshold stays at $600 or shifts to $5,000, one thing is certain: the digital economy is here to stay, and with it comes a new era of financial transparency. The winners in this new landscape will be those who view compliance not just as a requirement but as a chance to lead, innovate, and thrive.
Looking for a seamless way to manage your tax information reporting? Sovos offers a range of 1099 solutions to simplify compliance, no matter the threshold. Stay compliant, reduce administrative burden, and file with confidence. Learn More
