Form 1099-K: What Businesses Should Know About New Threshold and Tax Implications

Businesses that utilize PayPal, Venmo, Cash App, and other platforms to receive payments for goods and services should understand the process involving Form 1099-K, especially regarding year-end preparations and tax filing.

The Internal Revenue Service (IRS) announced in late November 2024 that third-party settlement organizations will not face any penalties if they failed to withhold and pay backup withholding tax during the 2024 calendar year. However, third-party settlement companies will have requirements regarding the sending of Form 1099-K to taxpayers as part of the phase-in announced by the IRS last year. Forms must be sent to taxpayers who recorded more than $5,000 in business transactions in calendar year 2024. The threshold changes over the following two years. Form 1099-K must be sent to:

• Taxpayers who recorded more than $2,500 in business transactions in calendar year 2025.
• Taxpayers who recorded more than $600 in business transactions in calendar year 2026.

What Is Form 1099-K?

Form 1099-K is used to report the yearly gross amount of transactions (e.g., digital payments, credit card/debit cards, store value of gift cards, payment apps, and online marketplaces) that go through third-party settlement organizations (TPSO). The form is used to report taxable income.

TPSOs are required to send a copy of a 1099-K to a business or employer by Jan. 31 each year after filing the form with the IRS, but only if the threshold for a singular transaction or a combination of transactions surpasses the threshold.

Note: The 1099-K should not include reimbursement of personal expenses, such as a friend or family member paying back money for dinner. These types of reimbursements or even monetary gifts sent via a TPSO should be marked personal to avoid confusion and ultimately inclusion in the reporting.

Why Did the Form 1099-K Threshold Change?

In 2021, the American Rescue Plan Act changed the reporting threshold on business transactions for TPSOs. The intent was to provide the federal government access to billions of taxable income dollars that go unreported through payment apps such as PayPal, Venmo, Cash App, and others, as well as online marketplaces.

The original threshold of $20,000 (and more than 200 transactions). As noted above, this threshold will continue to drop over the next two years.

Businesses or employers should receive a 1099-K from every third-party settlement organization they used where the gross amount in dollars for transactions exceeds the designated threshold in a particular tax year.