As we approach another tax season, understanding key changes to tax reporting is essential to maintain financial well-being. For tax year 2024, a significant change in tax reporting requirements is underway. Impacting how taxpayers document and report third-party payment transactions to the IRS. Whether you’re a contractor, a reseller, or a freelancer receiving payments through apps like Venmo or PayPal, you must learn about the Form 1099-K threshold.
This revision affects how you track your income and may alter your tax responsibilities. Let’s dive into what these changes and how they can influence your tax planning for the year ahead.
What is Form 1099-K & What is Its Threshold?
Form 1099-K is an IRS tax form that reports payments received through third-party networks. Payment settlement entities, such as credit card companies and payment platforms, file this form to report transactions made in exchange for goods or services. This form covers payments through these networks to ensure these are accounted for compliant tax reporting purposes.
For the 2024 tax year, the threshold for issuing a Form 1099-K is when the total payments to a taxpayer exceed $5000. This change aims to increase transparency and compliance, especially in the growing hustle economy and online marketplace sectors.
From the IRs announcement:
“Under the guidance issued today, TPSOs will be required to report transactions when the total payments for those transactions is more than $5,000 in 2024. More than $2,500 in 2025; and more than $600 in calendar year 2026 and after.
Notice 2024-85 also announces for calendar year 2024, that the IRS will not assert penalties under section 6651 or 6656 for a TPSO’s failure to withhold and pay backup withholding tax during the calendar year.”
Previously, the threshold was at $20,000. This meant you had flexibility with more transactions and a greater dollar amount before a form was needed to be issued. The reduction in this threshold will impact many taxpayers, forcing more individuals to report income that they previously did not.
Understanding these changes is crucial for anyone who engages in business transactions via PayPal, eBay, Venmo, or similar entities. As the IRS tightens its requirements, you may receive a Form 1099-K for the first time if your transactions surpass this updated limit.
However, you don’t need to feel troubled by the Form 1099-K threshold update. You can consult a CPA, whether you have a startup, a small business, or resell goods as a side hustle.
Form 1099-K Threshold 2024
The Internal Revenue Service issued Notice 2024-85 PDF providing transition relief for third-party settlement organizations (TPSOs). Also known as payment apps and online marketplaces, regarding transactions during calendar years 2024 and 2025.
Under the recently issued guidance, TPSOs must report transactions with gross amounts equal to or more than $5,000 in 2024. Then the gross amount will go down to $2500 or more in 2025. And more than $600 in the calendar year 2026 and after.
Notice 2024-85 also announces for calendar year 2024, that the IRS will not assert penalties under section 6651 or 6656 for a TPSO’s failure to withhold and pay backup withholding tax during the calendar year.
TPSOs that have performed backup withholding for a payee during calendar year 2024 must file a Form 945 and a Form 1099-K with the IRS and furnish a copy to the payee.
For calendar year 2025 and after, the IRS will assert penalties under section 6651 or 6656 for a TPSO’s failure to withhold and pay backup withholding tax.
How Will This Update Affect You?
As an individual, this means the income you make from side gigs and paid through TPSOs like PayPal, Venmo, and other marketplaces, will become taxable. If the total amount of your transactions surpass $5000 in 2024. And as the Form 1099-K threshold goes down in the future, you may need to strategize differently to ensure your tax return is accurate.
