The Internal Revenue Service (IRS) recently announced an important change concerning the reporting of income received through third-party payment processors and online platforms. This change, initially proposed to take effect in 2023, has now been postponed to 2024, offering taxpayers, tax professionals, and third-party payment processors more time to adapt to the new requirements.
2023 will be treated as a transition year, during which the previous threshold of $20,000 and more than 200 transactions will remain in place. This delay is intended to reduce confusion and give all parties involved more time to prepare for the change.
It’s also important to note that the reporting requirements do not apply to personal transactions, such as birthday gifts, shared expenses for car rides or meals, or paying household bills. The focus is on commercial transactions, such as the sale of goods and services.
What do I have to do?
You need to keep a closer eye on your income through third-party payment processors.
While this change doesn’t mean you’ll owe more taxes, it does mean more of your income will be visible to the IRS. So, keeping your records straight and reporting your income accurately is crucial.
Under the American Rescue Plan, the IRS had planned to lower the threshold for reporting income via Form 1099-K. Previously, only transactions exceeding $20,000 and totaling more than 200 transactions in a calendar year needed to be reported. However, the new law aimed to significantly lower this threshold to just $600, regardless of the number of transactions. This change was intended to increase transparency and tax compliance, particularly in the growing digital economy.
This lower threshold would have meant that many more individuals and small businesses using platforms like online marketplaces or payment apps would need to report their income to the IRS. For example, if someone sold goods or services and received payments through platforms like PayPal or Etsy, they would have been required to report this income if it exceeded $600 in total.
Looking ahead to 2024, the IRS is considering a phased approach to the implementation of the new reporting threshold. They are planning to set an interim threshold of $5,000 for the 2024 tax year. This step is seen as a way to gradually introduce the new requirements, making the transition smoother for taxpayers and the tax system alike.
In addition to these changes, the IRS is also exploring updates to Form 1040 and related schedules for 2024. These updates aim to simplify the reporting process for taxpayers. Altering the Form 1040 series, which is used by over 150 million taxpayers, is a complex task that requires careful planning and consideration.
If you have questions about this update, please give me a call.