The Internal Revenue Service has delayed for one year implementation of new income reporting rules that would have dramatically changed the thresholds for third-party payment apps for income reporting requirements.
Currently, third-party apps, such as Venmo, PayPal or Zelle, are required to report income to the IRS and send 1099-K tax forms to third-party app users who receive more than $20,000 in payments or more than 200 transactions in any one year. The change in 1099-K requirements would have eliminated the 200 transactions threshold and cut the dollar amount of app payments during the course of one year to just $600.
Small business and consumer advocacy groups lobbied against implementation of the new reporting rules, arguing it would snare many individuals using third-party payment platforms to receive payments for nontaxable income, such as selling secondhand baby clothes or other personal items online, doing a limited amount of freelance work or even receiving payments from friends who are splitting entertainment bills.
“You’re out to dinner and all of the sudden over the course of a year you could very easily hit $600 in your Venmo account just from eating out with your friends and picking up the check so you can get your airline points, or something like that,” said Katie Vliestra, vice president of government relations at the National Association for the Self Employed.
The IRS will now treat 2023 as a transition year, which it said will reduce the potential confusion caused by the distribution of an estimated additional 44 million 1099-K forms to taxpayers who may not have a tax obligation.
NASE, and others argued the drastic changes for 1099-K reporting would be burdensome and confusing for entrepreneurs operating in the resale space, and could serve as a deterrent for these entrepreneurs.
1099-K forms are sent to taxpayers by companies for payments made to non-employees that do not have federal income tax withheld. The intent of the new IRS guidelines was to catch up to the Gig Economy and growing use of third-party payment apps for those self-employed or freelancers receiving payments for their work through those apps.
NASE supports two pieces of bipartisan legislation related to the 1099-K reporting requirement, which it said may craft a fair and equitable way forward.
“How do we adjust appropriately to deal with the fact that it is 2023 and there are a lot more people who are engaging in that peer-to-peer marketplace, and how do we isolate that from real taxable activity that is spurring our economic growth,” Vliestra said.
“No one is actually looking to skirt their tax obligation. That’s not what people want to do,” she said. “People just don’t want to interact with the IRS more than they have to. They want to pay their tax bill.”
For the 2024 tax reporting year, the IRS currently plans to require 1099-K reporting on payments totaling $5,000 or more. This is the second year the IRS has delayed implementation of new 1099-K reporting rules, having done so in 2022 as well.
