Don't Mess With Taxes

If you sold more than $5,000 in products or services through only apps and marketplaces, get ready to receive a tax form next year alerting you, and the Internal Revenue Service, of the potentially taxable income.

The amount will be reported on IRS Form 1099-K.

Changing 1099-K amounts: The fluid nature of the amount of earnings that trigger issuance of the reporting form has been a hassle for both taxpayers and the IRS since changes were made in the American Rescue Plan Act (ARPA) of 2021.

Before ARPA’s enactment, third-party settlement organizations, or TPSOs, — think PayPal, Venmo, CashApp, eBay, Etsy, Uber, Lyft, Airbnb, and more — weren’t required to send payment recipients the documentation unless the individuals received $20,000 in total earnings over more than 200 transactions in a tax year.

ARPA lowered the earnings trigger to $600 and it didn’t matter how many or few payment transactions were involved. The change was designed to get more people to report these earnings on their tax returns, since it’s harder to “overlook” the money when the IRS also is notified of the amount.

The $600 reporting trigger was supposed to take effect for the 2022 tax year. But complaints by taxpayers, TPSOs, tax professionals, and many on Capitol Hill prompted the IRS to delay implementation of the change. So, the $20,000/200 transactions rule remained in place.

Meanwhile, the IRS has been working on a transition plan to ensure that everyone is aware of the what, when, and how much details as to Form 1099-K issuance.  Basically, the tax agency is stair-stepping the amounts down to the law’s $600 level over several years.

Starting with this tax year.

New $5,000 payment trigger: On Nov. 26, the IRS announced that payment apps and online marketplaces will have to report transactions in 2024 that exceeded $5,000. The amount will be on 1099-K forms issued in January.

The formal change, detailed in IRS  Notice 2024-85, notes that the reporting amount trigger will drop to $2,500 in 2025. The ARPA-mandated $600 earnings trigger will take effect in tax year 2026 and subsequent years.

That notice’s amounts — $5,000 / $2,5000 / $600 — also are this weekend’s By the Numbers figures.

In addition, the IRS notice notes that for calendar year 2024, the agency won’t assert penalties set out in Internal Revenue Code section 6651 or 6656 for a TPSO’s failure to withhold and pay backup withholding tax during the calendar year. But TPSOs that have performed backup withholding for a payee during 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 assess those penalties against TPSOs that fail to withhold and pay backup withholding tax.

Time to adjust or change the law: This latest Form 1099-K phase-down amount trigger gives folks who use third-party payment services, either for their fulltime operations or for gig work they do, time to adjust to the lower reporting thresholds.

It also give opponents of the change, which includes many U.S. Representatives and Senators, time to craft new legislation to return to the old $20,000/200 transactions reporting threshold.

Several bills to do that have been introduced since the ARPA change, but none has made it into law. The IRS’ formal announcement of the 2024, 2025, and 2026 tax year reporting level triggers might just be enough to get a measure through Congress.

Who might receive Form 1099-K: But until the law is changed, many taxpayers might be surprised by the arrival of a Form 1099-K.

The statements will go out to those who received any payments via payment cards, including credit cards, debit cards, and gift cards.

Also, taxpayers who got payments via a payment app or online marketplace might get a 1099-K.

The payments could include amounts through any —

• Peer-to-peer payment platform or digital wallet;
• Online marketplace for the sale or resale of clothing, furniture, and other items;
• Craft or maker marketplace;
• Auction site;
• Car sharing or ride-hailing platform;
• Real estate marketplace;
• Ticket exchange or resale site;
• Crowdfunding platform; or
• Freelance marketplace.

When these payment amounts and methods are for income-producing goods and/or services, the earnings generally are taxable income that should be reported on the recipients' tax returns.

What isn’t taxable income: But here’s where the confusion comes in. Gifts or reimbursement of personal expenses from friends and family should not be reported on Form 1099-K.

This is such transactions as sharing the cost of a car ride or meal, receiving money for birthday or holiday gifts, or getting repaid by a roommate for a household bill.

The delay in the lower trigger amounts was, in part, for issuers to develop systems that ensure these types of payments aren’t counted toward required 1099-K issuance.

If you do get a Form 1099-K that includes personal, nontaxable transactions, contact the issuer immediately. They should issue you (and the IRS) a corrected 1099-K with only the taxable earnings listed.

Information only: Like other types of 1099 forms, the 1099-K is an information report. It is meant to assist the taxpayer in reporting their correct income on their tax return. You don’t have to include the 1099 with your tax filing.

Form 1099-K also assists the IRS in verifying that the amounts on tax returns are correct.

When the amounts on any of the many 1099 forms don’t match what’s on your Form 1040, the IRS will automatically send you a notice of the discrepancy. You must correct the wrong amount or explain why your amount is correct although it differs from what’s on the form, that’s Form 1099-K in this case.

If you don’t, you could end up owing additional taxes on unreported income. Worse, you' could face retroactive charges, penalties, and interest based on the incorrect reporting. And worst, you could end up facing a full-fledged tax audit.

Finally, even if you don’t get a 1099-K or any other 1099 detailing tax year earnings, you still are legally required to report those amounts. Sure, it’s harder for the IRS to track these usually smaller amounts, but do you really want to take a chance?

You also might find these items of interest:

• Don't fall for Form 1099-K myths this tax filing season (March 6, 2024)
• Confused by Form 1099-K? Check out IRS' updated FAQs (Feb. 10, 2024)
• 1099-K lower reporting threshold delayed again, this time to 2025

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