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. 

However, the Internal Revenue Service announced a delay in implementing the new threshold in an attempt to reduce any potential confusion that had been created. This gives businesses receiving payments through third-party platforms an additional transition year. 

The only businesses that will be required to report in tax year 2023 are those that received more than $20,000 and had more than 200 transactions on a third-party platform. 

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 January 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 IRS will implement a phase-in over the next two years to get to its desired $600 threshold, so for tax year 2024 the threshold will be $5,000 and in tax year 2025 it will be $600.

These are significant changes from the original $20,000 (and more than 200 transactions). 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.  

What’s Next?

Paychex will continue to monitor this situation, so return to this article for future updates.