BUSINESS INCOME AND THIRD PARTY PAYMENT PLATFORMS: NEW IRS THRESHOLD FOR FORM 1099-K REPORTING

This tax season, an IRS rule change may require many freelancers, contractors, gig workers, and small business owners who use third party payment platforms or online marketplaces like Cash App, Paypal, Venmo, Stripe to comply with new tax reporting requirements. The IRS’ rule, which requires third party payment platforms to issue 1099-K forms to certain users for tax reporting, was supposed to go into effect in 2021 but was postponed through 2023 and is now being implemented in phases. 

Originally, the rule required third party payment platforms to issue 1099-K forms for users who had 200 transactions totaling more than $20,000 within a year. The new rule eliminates the number of transactions and lowers the dollar amount threshold per year. For instance, the dollar amount threshold for the 2024 calendar year is $5,000. In 2025, the threshold amount will be further reduced to $2,500, and in 2026, the threshold amount will be $600. With this new rule change, small businesses who previously did not receive 1099-K forms can expect to receive them and to report them on their tax returns. To small businesses in states like Maryland and Virginia, which already have a $600 reporting threshold, this IRS rule change comes as no surprise. 

It is important to note that third party payment platforms are only required to issue 1099-K forms for business transactions—payment for goods or services, including tips, and rent payments—amounting to the dollar threshold on that particular platform; the rule does not apply to personal transactions. Further, businesses should know that business transactions on the Zelle payment platform are not subject to 1099-K reporting requirements since the platform doesn’t hold money in an account like other payment platforms. However, Zelle business transactions should be reported on Schedule C of Form 1040 for tax compliance. 

Due to the nature of third party payment platforms, it is imperative to ensure that your business’ 1099-K form is accurate. Small businesses should consider setting up multiple accounts to keep reportable transactions separate from personal transactions. Additionally, businesses should promptly contact their payment platform if the platform issues an incorrect 1099-K to ask for a corrected form. Note that this rule change does not alter businesses’ tax obligations in any way.

The SJS Law Firm can help your small business navigate these new regulatory changes. For a complimentary consultation, please contact us at (202) 505-5309.