Attentionfor independent workers and small business proprietors: The Internal Revenue Service might require some additional information from you.
You might expect an escalation in the number of 1099-K forms you receive, particularly if you've never encountered them before from platform providers. This influx is anticipated to intensify in 2025 and beyond.
Let me explain the reasons behind this and provide relevant information for your 2024 tax filing next year.
alteration in regulations with partial implementation
A regulatory adjustment, which significantly increased third-party payment platforms' duty to issue 1099-K forms to users, was supposed to be implemented in 2021. However, the Internal Revenue Service (IRS) postponed the execution for 2021, 2022, and 2023, and has now decided to implement it partially for 2024 and 2025.
The initial regulation mandated a third-party platform to send you a 1099-K provided you had more than 200 business transactions annually on the platform, and the overall transaction value exceeded $20,000. Consequently, the change affected only a limited number of individuals.
The new regulation, however, has far-reaching implications due to the elimination of the transaction number threshold and drastic reduction of the dollar threshold to over $600 for all transactions combined. According to IRS estimates, this adjustment may result in the distribution of "44 million Forms 1099-K to numerous taxpayers who wouldn’t expect one."
Nonetheless, this change hasn't been executed entirely yet.
Last month, the IRS announced that for the 2024 calendar year, the dollar threshold would decrease to $5,000, and for 2025, it will be $2,500. The rule is only set to be fully implemented at $600 in 2026, five years later than originally planned.
Even at the $5,000 level, companies are expecting to issue 150% more 1099-K forms than they typically have, said Wendy Walker, a vice president of regulatory affairs at Sovos, a company that assists businesses with 1099 reporting among other things.
"So if a client (was issuing) 10,000 forms at the (old) threshold, that client is reporting an estimated 25,000 forms at the $5,000 threshold," Walker explained.
Your 2024 taxes
If you had more than $5,000 in gross business transactions on a specific app or platform during this year, both you, the IRS, and your state tax department should receive a 1099-K that reflects this amount.
(If you reside in states like Maryland, Virginia, Massachusetts, or Vermont, which already have a $600 reporting threshold, this information may not be new to you.)
The IRS mentions in its 1099-K guide that some companies may choose to send a 1099-K to users with business transactions below $5,000.
A business transaction is categorized as payment for a product or service via the platform, including tips, as well as property rent. It does not include personal payments you might receive from friends or family.
Some aspects will remain unchanged — including your tax obligation and the potential for errors
Keep in mind that the rule change does not revise your tax responsibilities in any way. You've always been obligated to report all your taxable business transactions. It only means that there will be more third-party reporting directed towards tax authorities now.
Familiarize yourself with how the platforms where you conduct business plan to manage their 1099-K reporting and what they may require from you to facilitate this. They might, like Venmo and Etsy, have a dedicated page for this topic.
If you end up receiving a 1099-K in error, such as a form that shows personal transactions, take a look at this IRS document for advice on rectifying the situation.
Generally speaking, the IRS expects you to report information from all recognized 1099-Ks on your 2024 return, and then correct any errors on that return or through an amended return following the original filing deadline to avoid penalties if you owe money.
"If (the 1099-K) is not business income, or it is for personal transfers of money between family and friends, or it is for the sale of personal items at a loss, it still has to be reported — aka, accounted for," said David Mellem, a partner at Ashwaubenon Tax Professionals.
So, analyze the 1099-Ks that you receive to ensure they are accurate. If they're not, request a corrected 1099-K from the issuer, hopefully before your official filing deadline so you can include it in your return along with the other 1099s you receive.
As a result of the regulatory changes, you may need to pay closer attention to your business transactions for tax purposes in the coming years. Starting from 2024, businesses are expected to issue 1099-K forms for any user with over $5,000 in gross business transactions, a significant increase from the previous threshold of $20,000. This could potentially lead to an influx of these forms in your business affairs, especially in 2025 when the threshold further drops to $2,500.
