Editor’s note: This blog was updated on November 28, 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.
As the online platform economy has evolved, the related tax reporting requirements are also changing and becoming more intricate for businesses. With Form 1099-K reporting, organizations must ensure that they are up to date on all IRS and state tax regulations to stay in compliance.
Form 1099-K is not necessarily a requirement for all businesses – only for those that facilitate payment card transactions or third-party network transactions (e.g., PayPal or Venmo). Additionally, 1099-Ks allow the U.S. government to track online sales completed by retailers. The 1099-K form information helps the IRS ensure that online retailers are properly reporting all types of income for tax purposes. Third-party processors and credit card companies are required to report the payment transactions they process on behalf of retailers.
What’s changing for tax year 2023?
The American Rescue Plan Act of 2021 (ARPA) changed the required Form 1099-K reporting thresholds for TPSOs from $20,000 paid over 200 transactions to a single recipient during the calendar year to $600 and no transaction limit. Though this change was originally set to be implemented for 2022 returns, the IRS released last-minute guidance in late December of 2022, pushing implementation of the new $600 reporting threshold to 2023. However, in November 2023, IRS Notice 2023-74 further delayed and made changes to the implementation of the lowered reporting threshold.
Specifically, the Notice indicates that the IRS will phase in the reporting threshold change and will continue to treat 2023 as a “transition year.” This means that for 2023 returns, TPSOs will be required to report Form 1099-K when the aggregate of payments paid to a payee in a calendar year is $20,000 and those payments are paid over 200 transactions.
For 2024 returns, the Notice requires TPSOs to report Form 1099-K following a new threshold of $5,000 (and 0 transactions).
Additionally, ARPA clarified that Form 1099-K reporting by TPSOs is only applicable for goods and services transactions. Electronic platforms that facilitate charitable donations or that facilitate payments that do not represent goods and services, should not report Form 1099-K (note that these transactions may be reportable on other information returns such as Form 1099-NEC or MISC).
Who is impacted?
The Form 1099-K reporting changes will affect TPSOs of all kinds – gig economy payers (e.g., Uber, Lyft), platform marketplaces (e.g., Etsy, Facebook) and other companies that facilitate goods and services payments through electronic platforms (e.g., PayPal). Payment settlement entities (PSEs) that facilitate payment card transactions will not be affected because they were already required to report all amounts and transactions on Form 1099-K.
What are implications of the 1099-K reporting changes?
For some taxpayers who sold personal items through online platforms like eBay, or who received payments through Venmo for personal reasons, the change in reporting threshold may result in receiving a Form 1099-K even though those amounts may not be taxable. Most of these taxpayers have never received a Form 1099-K and may not understand why they received it or how to process the form with respect to their annual income tax returns.
For other taxpayers working in the gig economy, like rideshare drivers, individuals selling crafts on platform marketplaces as a business, or even independent contractors, the change in reporting threshold may result in receiving a Form 1099-K even though they may not have received a form in previous years. The rise of the gig economy helped to spur the change in the 1099-K reporting threshold. For example, the summer of 2020 saw 24% more people entering the gig economy than in previous years, according to an Upwork study. Historically, although all income earned by nonemployees is reportable (whether or not they received a Form 1099-K), these workers may be receiving the form for the first time and may not know how to properly include the income on their annual income tax return.
To help taxpayers understand the changes and how to prepare for them, the IRS has expanded the online Form 1099-K FAQs to account for many of these scenarios with different facts and circumstances. And, last week at the IRS Nationwide Forums, there were numerous educational sessions for tax preparers to learn how to prepare income tax returns to avoid triggering IRS notices because of mismatches between amounts reported on Forms 1099-K and amounts reported on the income tax return.
Although charitable donation payments are not reportable, crowdfunding payments may be impacted by the 1099-K reporting update. As we discussed in an earlier blog, payment processors that facilitate crowdfunding payments are obligated to report Form 1099-K when they make distributions of crowdfunding amounts that aggregate to $600 or more AND when those same campaign contributors receive goods and/or services in exchange for their donations.
TPSOs will be affected by the lowered payment threshold and for many, this could mean a 50 to 100% increase in Forms 1099-K needing to be issued. Manual reporting processes previously utilized may no longer be scalable with the increased workload associated with issuing more forms. Ensuring forms are accurate and can be delivered efficiently and timely is crucial to minimizing information reporting penalties for filing late.
Additionally, an increase in form volumes may also result in more name and TIN combinations to manage for purposes of 1099 reporting. TPSOs will need a way to verify name and TIN combinations quickly in order to avoid Backup Withholding obligations and the related liability for withholding for failing to comply.
Best practices to prepare for the 1099-K
Here are some key ways to ensure compliance, even with evolving tax information reporting requirements:
- Collect a Form W-9: while not a legal requirement, it can be beneficial for ensuring accurate information is collected.
- Verify taxpayer identification numbers (TINs) via TIN matching solutions.
- Ensure your 1099 process and technology can scale to meet the new form volumes expected to be produced for the 2023 tax year
- Issue 1099-K forms electronically to minimize costs of printing and mailing so many more forms.
- Be ready to answer questions from recipients about the 1099-K (e.g., What education will first-time recipients need? Can your business handle the expected service volumes?)
- Make sure you do not skimp on state reporting obligations – state tax reporting for Form 1099-K has been required at lower thresholds for many years.
These Form 1099-K reporting updates are not the first changes made to annual tax reporting that businesses must adhere to – and they will likely not be the last. Working with the right partner can help the process remain seamless and keep your organization compliant.
Watch our webinar Best Practices for Addressing New 1099-K Reporting Requirements to learn more about the impacts of 1099-K.