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.
The IRS issued Notice 2023-10, delaying the implementation of the 1099-K reporting threshold and transaction limit change until 2023.
As a result, third-party settlement organizations (TPSOs) should only report 2022 Form 1099-K to payees when the aggregate of transactions was in excess of $20,000 paid over 200 or more transactions during the 2022 calendar year.
The notice underscores that the IRS is granting this relief to allow for a “transition year” for taxpayers and that the new $600 threshold (and no transaction limit) will be effective with 2023 returns issued in 2024.
Background on 1099-K reporting changes
For 2022 Form 1099-K reporting, The American Rescue Plan Act of 2021 (ARP) changed the required reporting thresholds for some filers. Up until 2022, a TPSO was required to report Form 1099-K when the aggregate of payments paid to a payee in the calendar year was in excess of $20,000 and those payments were paid over 200 transactions. The ARP lowered the reporting threshold to $600 and eliminated the transaction limit for 2022 returns that are soon to be issued and filed with the IRS.
With Notice 2023-10, the IRS will revert to the previous reporting. This will apply to tax year 2022 reporting, and the updated threshold of $600 or more will apply to returns generated for tax year 2023 and beyond.
Further, the IRS will not apply penalties under Sections 6721 and 6722 against TPSOs that fail to file or furnish Form 1099-K unless that failure relates to aggregate payments that exceed $20,000 along with an excess of 200 transactions.
The notice does not delay the change in requirement to only report ‘goods and services’ on Form 1099-K
While the IRS is delaying the implementation of the reporting threshold changes, there is no delay provided with respect to other changes modified by Section 9674(a) of the ARP. Specifically, ARP included a change to IRC 6050W(c)(3) to eliminate confusion with TPSOs that facilitate nontaxable payments, including charitable donations made through crowdfunding platforms.
Notice 2023-10 does not delay the implementation of this change – TPSOs should only report goods and services transactions for 2022 Form 1099-K reporting purposes.
You must report Form 1099-K if you backup withheld on any payments
The notice also clarified that those payers who have performed backup withholding in accordance with Section 3406(a) during calendar year 2022 must file Form 1099-K (and furnish a copy to the payee) if the total payments to the payee exceeded $600 for the calendar year.
In other words, TPSOs should report 1099-Ks for all payees that were subjected to backup withholding without regard to the delay in the reporting threshold for the form.
How does this change impact 1099-K reporting to the states?
Most states require businesses to submit a variety of 1099 and W-2 form information for their residents. Some states receive the 1099 information through the IRS’ Combined Federal State Filing (CF/SF) program, meaning the IRS automatically shares the 1099-K information with the state of the payee listed on the form.
However, there are many states that either do not participate in the CF/SF or they require 1099-K information to be reported at lower thresholds than the historical $20,000 and 200 transaction limits set by the IRS.
These states require 1099-K reporting following the IRS reporting thresholds. However, these states do not participate in the CF/SF, so the 1099-K information must be filed with these states directly:
- Alabama
- Florida
- Montana (although listed as a CF/SF state with the IRS, Montana specifically states that CF/SF does not satisfy a business’ tax filing requirement)
- New York
- Tennessee
These states require 1099-K reporting following the IRS thresholds. These states also participate in the CF/SF, so you do not need to submit separate 1099-K information:
- California
- Connecticut
- Georgia
- Hawaii
- Kansas
- North Carolina
These states require 1099-K reporting following a different threshold than the IRS. For these states, you will need to file the 1099-K information directly:
- Arkansas – Any 1099 reporting $2,500 or more
- District of Columbia – Reporting threshold is $600
- Illinois – Reporting threshold is $1,000 and four transactions
- Maryland – Reporting threshold is $600
- Massachusetts – Reporting threshold is $600
- Mississippi – Any payment over $600
- Oregon – Reporting threshold follows IRS but only submit to Oregon when you are required to issue at least 10 returns
- Vermont – Reporting threshold is $600
- Virginia – Reporting threshold is $600.
CAUTION: In all cases where state taxes were withheld from a payee, you must file the 1099-K information directly with the state.
For 2022 reporting, make sure that you follow the state reporting requirements for reporting 1099-K information – do not assume that the IRS CF/SF will take care of those obligations for you.
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