The Internal Revenue Service (IRS) has unveiled Notice 2024-85, offering transitional relief for third-party settlement organizations (TPSOs) like PayPal, Venmo, and online marketplaces.
The updated Form 1099-K threshold for 2024 is set at $5,000, easing the compliance burden for small businesses, gig workers, and freelancers. The changes aim to reduce underreported income while allowing time to adapt to new tax reporting norms.
Relief for 2024 and Beyond
For the 2024 tax year, TPSOs are required to report transactions exceeding $5,000. This temporary threshold provides a buffer before it decreases to $2,500 in 2025 and $600 in 2026. These changes will eventually broaden the scope of transactions subject to Form 1099-K reporting.
Additionally, the IRS will not enforce penalties under sections 6651 and 6656 for failure to withhold backup taxes during 2024. However, any TPSO that performed backup withholding must still submit Form 945 and Form 1099-K to the IRS and provide copies to payees.
Impact on Small Businesses and Gig Workers
The gradual implementation of lower reporting thresholds directly affects small businesses and individuals who rely on digital payment platforms.
New Challenges:
- Increased Reporting Requirements:
- Many sellers on platforms like eBay or Etsy will now receive Form 1099-K, even for modest sales.
- Gig workers using payment apps will need to ensure proper income documentation.
- Administrative Burdens:
- TPSOs report gross payments, not accounting for fees or expenses.
- Small businesses must reconcile income from Forms 1099-K with actual taxable income, requiring meticulous record-keeping.
Year |
Threshold |
|---|---|
| 2024 | $5,000 |
| 2025 | $2,500 |
| 2026 and later | $600 |
Best Practices for Navigating the Changes
Adapting to the new IRS requirements will be essential for businesses and individuals to avoid complications.
- Separate Personal and Business Transactions:
Keep personal payments and business transactions on separate accounts to streamline reporting. - Maintain Detailed Records:
- Track income and deductible expenses regularly.
- Store receipts and payment summaries for accurate filing.
- Consult Tax Professionals:
Seek guidance to navigate evolving thresholds and minimize errors in tax preparation.
Looking Ahead
The IRS’s gradual reduction in the Form 1099-K threshold highlights a shift toward increased transparency in digital transactions. While these changes aim to enhance compliance, they also present challenges that will require careful preparation.
By staying informed and proactive, taxpayers can better manage their obligations under these new regulations.
