Due to concerns regarding the implementation timeline, reporting thresholds for third-party settlement organizations that were set to take effect on January 1, 2023, have been delayed. As such, third-party settlement organizations will not be required to report tax year 2022 transactions on a Form 1099-K to the IRS or the payee for the lower, $600 threshold amount enacted as part of the American Rescue Plan of 2021.
Instead, calendar year 2022 will be a transition period for implementation of the lowered threshold reporting for third-party settlement organizations (TPSOs) including Venmo, PayPal and CashApp that would have generated Form 1099-Ks for taxpayers. The additional time will help reduce confusion during the upcoming 2023 tax filing season and provide more time for taxpayers to prepare and understand the new reporting requirements. This change under the law is important because tax compliance is higher when amounts are subject to information reporting, like the Form 1099-K.
Taxpayers should note, however, that the existing 1099-K reporting threshold of $20,000 in payments from over 200 transactions remains in effect. Taxpayers should also know that the law is not intended to track personal transactions such as sharing the cost of a car ride or meal, birthday or holiday gifts, or paying a family member or another for a household bill.
The American Rescue Plan of 2021 changed the reporting threshold for TPSOs. The new threshold for business transactions is $600 per year; a change from the previous threshold of more than 200 transactions per year, exceeding an aggregate amount of $20,000. Under the law, beginning January 1, 2023, a TPSO is required to report third-party network transactions paid in 2022 with any participating payee that exceed a minimum threshold of $600 in aggregate payments, regardless of the number of transactions. TPSOs report these transactions by providing individual payee’s an IRS Form 1099-K, Payment Card and Third-Party Network Transactions.
The transition period delays the reporting of transactions in excess of $600 to transactions that occur after calendar year 2022. It is intended to facilitate an orderly transition for TPSO tax compliance, as well as individual payee compliance with income tax reporting. A participating payee, in the case of a third-party network transaction, is any person who accepts payment from a third-party settlement organization for a business transaction.
Taxpayers who may have already received a 1099-K as a result of the statutory changes, should know that the IRS is working rapidly to provide instructions and clarity so that taxpayers understand what to do. Additional details on the delay will be available in the near future along with additional information to help taxpayers and the industry; however, don’t hesitate to call our office with any immediate concerns or questions.