Form 1099-K, officially known as “Payment Card and Third Party Network Transactions,” is an IRS tool designed to track payment transactions and ensure accurate income reporting. Issued by payment settlement entities—including banks, credit card companies, and third-party platforms like PayPal or Venmo—this form reports the total dollar amount of transactions a business or individual receives in a given year. While the goal is to improve tax compliance, the evolving rules around reporting thresholds have caused a fair amount of confusion.

The Key Players in 1099-K Reporting

To understand how this form impacts taxpayers, it’s important to break down the key terms. A Payment Settlement Entity (PSE) refers to any institution that processes transactions, including credit card companies and third-party settlement organizations (TPSOs). A participating payee is anyone who accepts payments through these channels, whether they are a small business, an independent contractor, or an online seller. The gross amount of reportable transactions is the total value reported on Form 1099-K before considering fees, refunds, or chargebacks. That means the number on the form might look higher than the taxpayer's actual income, which can sometimes cause confusion when filing.

Lower Reporting Thresholds and What That Means for Taxpayers

For years, TPSOs were only required to report payments if the total amount exceeded $20,000 and the taxpayer had more than 200 transactions in a year. However, in an effort to capture more taxable income, the American Rescue Plan Act of 2021 drastically lowered the reporting threshold to $600, regardless of how many transactions occurred. This change meant that even small-scale sellers and gig workers could start receiving Form 1099-K, significantly expanding the number of people required to report their earnings.

IRS Transition Periods: A Slow Rollout of Big Changes

Recognizing the potential confusion and administrative burden, the IRS decided to phase in the lower threshold over several years. For tax years 2022 and 2023, the IRS held off on enforcing the $600 rule, sticking to the previous $20,000 and 200-transaction requirement. In 2024, they’re easing into the new rule by lowering the threshold to $5,000. Then, in 2025, the limit will drop again to $2,500, before the final $600 threshold is supposed to take effect in 2026. These gradual changes mean tax professionals need to keep their clients informed each year to avoid surprises when filing.

Filing Requirements and Backup Withholding Rules

Taxpayers who receive Form 1099-K should expect to see it in their mailbox (or inbox) by January 31 of the following year. The form breaks down transactions month by month, helping both the IRS and taxpayers track payment trends. If a payee fails to provide a correct Taxpayer Identification Number (TIN), things get more complicated. Payment settlement entities are required to withhold 24% of the reported payment as backup withholding. This means clients who ignore requests for their TIN could see a chunk of their income disappear before they even get it.

Why This Matters for Your Clients

One of the biggest challenges for tax professionals with Form 1099-K is ensuring clients understand what to do with it. Many taxpayers assume the number on the form represents their taxable income when, in reality, it often includes refunds and fees that should be accounted for separately. Even if a taxpayer doesn’t receive a 1099-K, they are still required to report all of their income, so accurate record-keeping remains essential.

Fixing Mistakes on Form 1099-K

Errors on Form 1099-K can and do happen, so it’s crucial for taxpayers to review their forms carefully. If something looks off, such as an incorrect total or payments listed under the wrong taxpayer ID, the first step is to contact the issuer and request a correction. If that isn’t possible before tax time, the taxpayer can report the incorrect amount on their return and use an offsetting entry to ensure they aren’t over-reporting their income. The key is to address any discrepancies early to avoid unnecessary IRS scrutiny.

Looking Ahead: The Final Countdown to the $600 Rule

As of now, the final $600 threshold is expected to take effect for tax year 2026, but tax professionals should monitor any further IRS updates. If the $600 rule does take effect, more taxpayers will receive Form 1099-K than ever before, making it even more important for tax professionals to educate their clients about what it is and how to handle it. The best strategy? Encourage accurate bookkeeping, clarify reporting obligations, and stay ahead of these evolving IRS requirements. By doing so, tax professionals can help their clients avoid confusion and potential tax headaches down the road.

 Hayley Bales | Tax Protection Plus

References

1. Internal Revenue Service, Form 1099-K: Payment Card and Third Party Network Transactions (Washington, D.C.: Department of the Treasury, 2024).

2. Internal Revenue Service, "IRS Announces Delay in $600 Form 1099-K Reporting Threshold Implementation," news release, December 2023, https://www.irs.gov/newsroom.

3. American Rescue Plan Act of 2021, Public Law No. 117-2, U.S. Statutes at Large (2021).

4. Internal Revenue Code, 26 U.S.C. § 6050W(e) (2024).