IRS delays implementation of lower $600 reporting threshold for 1099-K

ARTICLE | November 29, 2023

Authored by RSM US LLP

Executive Summary

As 2023 comes to an end and just in time for the holidays, the IRS threw a much needed 'hail Mary’ pass to payment processors and online marketplaces that settle payments for customers by announcing yet another delay in implementation of the lower $600 form 1099-K reporting threshold for third-party settlement organizations (TPSOs). On Nov. 21, 2023, the IRS released Notice 2023-74  announcing that third-party settlement organizations (TPSOs) will not be required to report tax year 2023 transactions on a Form 1099-K to the IRS or to a payee for the lower $600 threshold amount enacted as part of the American Rescue Plan of 2021.  Instead, according to the guidance, tax year 2023 will be another transition year during which TPSOs may continue reporting gross aggregate payments greater than $20,000 and more than 200 transactions on forms 1099-K which are due in January 2024.

• The delayed reporting effects payment processors and online marketplaces such as Venmo, Paypal, eBay, Etsy, etc.  
• The 2021 Act requires these businesses to issue Form 1099-K to customers with non-personal transactions with gross amounts greater than $600, which could be difficult for payment processors to differentiate from personal transaction in some cases. 
• The proposed lower threshold is expected to tremendously increase the volume of Forms 1099 filed by over 30M forms, which industry is not prepared to file and which  the IRS is not currently equipped to handle/process.
• Beginning with tax year 2024, the IRS will phase in a new lower threshold of $5,000 while it works to clarify rules for implementing the new system.  

IRS delays implementation of lower $600 reporting threshold for 1099-K

Phase-in approach for new 1099-K reporting requirements

The IRS has recently released Notice 2023-74 ('the Notice’) announcing a phased-in approach for the $600 reporting threshold previously scheduled to be implemented in tax year 2023. Instead of requiring TPSOs to immediately implement the lower $600 threshold for reporting payments, the Service will instead phase in a  threshold of $5,000 for reporting transactions beginning with tax year 2024.  Section 6050W of the code generally requires payment settlement entities (PSEs) to file an information return for each calendar year with respect to payments made in settlement of certain reportable payment transactions.¹

According to the Notice, for tax year 2023, TPSOs will continue to be required to report taxpayers with over $20,000 in gross payments and over 200 transactions. Beginning with the tax year 2024 reporting cycle, the gross payment threshold will be lowered to $5,000.  The IRS has also indicated in the Notice that it will not assert penalties under section 6721 or section 6722 against TPSOs for failing to file or failing to furnish Forms 1099-K with respect to a payee unless the gross amount of aggregate payments to be reported exceeds $20,000 and the number of such transactions with that participating payee exceed 200.

The law previously extended in December of 2021, was enacted as a part of the American Rescue Plan of 2021 and changed the reporting threshold for TPSOs. While the new threshold was not intended to track personal transactions, industry has noted that many taxpayers would not be able to differentiate which transactions are personal and which are the result of a 'small and casual’ business.

The incremental approach allows the IRS, taxpayers and form filers time to both understand the complexities surrounding the new rule and better prepare for the reduced threshold, which is estimated to result in an increase of 30 million forms according to a previously published Government Accountability Office report.  In addition to processing volumes, the reduced threshold will result in the IRS updating its annual income tax return form and schedules. A delayed approach will allow more time for TPSOs to update their systems and implement the new threshold requirement as well as to identify the appropriate recipients of these forms as was intended by Congress.

Note: The $600 reporting threshold will still apply in limited circumstances, such as for payment card transactions and for payments subject to backup withholding.  As such, TPSOs that have performed backup withholding under section 3406(a) for a payee during calendar year 2023 must file a Form 945 and a Form 1099-K with the IRS and furnish a copy to the payee if total reportable payments to the payee exceeded $600 for the calendar year.

The Notice is much needed relief for TPSOs, the IRS, and recipients who are still scrambling to manage risk associated with filing, issuance, and receipt of larger volumes of returns.

1Section 6050W(b)(3) defines a TPSO as the central organization that has the contractual obligation to make payment to the participating payees of third party network transactions.