This blog was last updated on November 27, 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 transactions exceeding $600 in aggregate payments within a calendar year, regardless of the number of transactions. This change, introduced by Congress in the American Rescue Plan Act of 2021, drastically reduced the previous threshold of $20,000 and 200 transactions.
To ease the transition, the IRS delayed enforcement of the $600 threshold for tax years 2022 and 2023. Recently, Notice 2024-85 established that 2024 will serve as a further transition period, setting the threshold at $5,000. This phased approach provides TPSOs additional time to adapt their processes and technologies to handle the increased reporting burden.
Future Adjustments
Looking ahead:
- 2025: The reporting threshold will be $2,500.
- Post-2025: The $600 reporting threshold will be applicable.
TPSOs must stay informed as enforcement evolves.
Why the Confusion? Conflicting Guidance on Form 1099-K
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.
Until the IRS released the clarification in the reporting threshold for 2024 season in Notice 2024-85, the industry was relying on unofficial (and conflicting) guidance. For instance:
- 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.
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 made this anything but simple.
Given the ever-changing regulatory environment, 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 Future Thresholds: The IRS’s phased approach—$5,000 in 2024, $2,500 in 2025, and $600 by 2026—requires forward-thinking compliance strategies. 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. 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
