The IRS Listened and Postponed Implementation
Let’s start with some history and definition of the issues. IRS Form 1099-K is an information form typically provided to freelancers or small business owners who receive payments of income from a client via a third-party payment system. Third-party settlement organizations generally include banks or other organizations (e.g., Venmo, PayPal, or Cash App) that process credit card transactions on behalf of a merchant and make an interbank transfer of funds to the merchant from a customer…often identified as self-employment income.
Prior to passage of the American Rescue Plan Act (ARPA) of 2021, third-party settlement organizations were not required to file Form 1099-K to payees with 200 or fewer transactions during the calendar year with aggregate payments of $20,000 or less. The ARPA amended the minimum payment amount to $600, for one or more transactions beginning in 2022.
Apparently, this revision was prompted by the convenience of Venmo, PayPal, or Cash App which resulted in many individuals paying personal expenses as well as payments associated with goods and services with these apps.
Unless the account or payment is designated as personal, it will trigger a reporting requirement if the annual amount exceeds $600. The person receiving the funds could receive a Form 1099-K, and the IRS will expect to see that income reported on his or her tax return. Payments incorrectly classified as business (goods or services) will trigger a Form 1099-K as well.
The new $600 minimum triggered widespread criticism. Lowering the threshold from $20,000 to $600 substantially increases the number of Forms 1099-K that will be issued. Additionally, the revision lacked clear guidance from the IRS which generated more taxpayer confusion. Those concerns coupled with the existing IRS backlog and impact on the upcoming filing season caused stakeholders to urge the IRS to postpone the implementation of the new reporting requirements.
Happily, The IRS responded in Notice 2023-10 to delay lowering the threshold for Form 1099-K reporting by a year. The $20,000 and 200 transactions thresholds remain in place through December 31, 2023.
The IRS emphasized the lower reporting threshold (any number of transactions totaling $600) remains in effect for calendar years starting after December 31, 2022. This one-year delay does not apply to any of the other Form 1099-K rules not modified by the ARPA.
Taxpayers should continue to track and report their taxable income from all sources electronic and others. When using electronic payment systems, such as PayPal, Venmo, and Cash App, make sure personal payments like gifts or reimbursements to friends are properly classified as an amount paid for something other than goods or services.