Transition period for minimum threshold for Form 1099K reporting

In brief

What happened? 

The IRS on November 26 issued Notice 2024-85 (Notice) announcing that calendar years 2024 and 2025 will be regarded as the final transition periods for purposes of enforcement and administration with respect to the implementation of the amendments made by the American Rescue Plan Act of 2021 (ARP) to the Section 6050W(e) minimum threshold for Form 1099-K, Payment Card and Third Party Network Transactions, reporting by third-party settlement organizations (TPSOs).

The Notice requires TPSOs (e.g., online marketplaces, payment apps) to report payments in settlement of third-party network transactions with respect to a participating payee when the total amount of payments for those transactions exceeds $5,000 during calendar year 2024, $2,500 during calendar year 2025, and $600 during calendar year 2026 and thereafter. The Notice also obsoleted Notice 2011-42 and provides transitional relief for calendar year 2024 from certain penalties for TPSOs making payments to participating payees in settlement of third-party network transactions that fail to impose backup withholding tax on these payments.

Why is it relevant? 

This final transition period provided by the Notice is intended to facilitate an orderly transition for TPSO compliance with Section 6050W(e) and participating payee compliance with income tax reporting. Without this Notice, TPSOs would be required to start reporting after the $600 threshold is met. The Notice provides TPSOs with the promised relief they have been waiting for all year. 

Actions to consider 

TPSOs that have not taken steps to collect participating payees’ taxpayer identification numbers (TINs) in the proper manner should use this narrow relief window to obtain the TINs to avoid the obligation to impose backup withholding tax beginning January 1, 2025.

Some states have passed legislation that does not conform to the federal reporting thresholds. TPSOs should review the states where their participating payees reside to determine whether a lower reporting threshold applies in a given calendar year and take steps to comply with the state Form 1099-K reporting standards.

Observation: Representative Carol Miller (R-WV) in 2023 introduced legislation that would reinstate the original reporting threshold of $20,000 and 200 transactions. This legislation has not passed; however, the continued efforts by some members of Congress to include modifications to the reporting thresholds in proposed legislation suggests that Congress ultimately could enact a reporting threshold that is higher than $600. TPSOs should stay alert for future developments.