IRS Will Phase in $600 Form 1099-K Reporting Threshold in 2026

Tax reporting requirements for online marketplace sellers and gig workers who receive payments via apps like PayPal and Venmo will change dramatically in 2026 when the new $600 Form 1099-K reporting threshold finally kicks in.

The IRS announced additional transition relief on Nov. 26 for payment apps and e-commerce marketplaces, referred to by the agency as “third-party settlement organizations” (TSBO), before the $600 threshold goes into effect. According to the IRS, TSBOs will be required to report transactions when the amount of total payments for those transactions is more than $5,000 in 2024, more than $2,500 in 2025, and more than $600 in calendar-year 2026 and beyond.

Implementation of the $600 reporting threshold was delayed in December 2022 and again last November by the IRS to try to alleviate confusion around the new reporting rules, which were enacted by the American Rescue Plan Act in 2021 as a way for the U.S. government to collect additional taxes from business owners or those with a side hustle who receive payments via a third-party payment processor.

Online shopping sites, such as Etsy and eBay, and payment network PayPal, among other companies, had urged lawmakers to change the new $600 reporting threshold for Form 1099-K; however, legislation to repeal the new reporting threshold hasn’t yet been passed in Congress.

Previously, to receive a 1099-K, Payment Card and Third Party Network Transactions, an online seller had to have at least 200 third-party payment network transactions totaling more than $20,000 in gross payments. Under the new rules, which removed the transaction quantity requirement, a single transaction on a payment network of just $600 can trigger a 1099-K. These requirements even pertain to reselling concert tickets.

Around this time last year, the IRS said it would treat 2023 as an additional transition year, which “will reduce the potential confusion caused by the distribution of an estimated 44 million Forms 1099-K sent to many taxpayers who wouldn’t expect one and may not have a tax obligation. As a result, reporting will not be required unless the taxpayer receives over $20,000 and has more than 200 transactions in 2023.”

The agency said last November that it was planning for a reporting threshold of $5,000 for tax year 2024 before phasing in the $600 reporting threshold.

“Taking this phased-in approach is the right thing to do for the purposes of tax administration, and it prevents unnecessary confusion as we continue to look at changes to the Form 1040,” IRS Commissioner Danny Werfel said last November. “It’s clear that an additional delay for tax year 2023 will avoid problems for taxpayers, tax professionals, and others in this area.”

Notice 2024-85, which was issued earlier today by the IRS, also announces that for calendar-year 2024, the IRS won’t assert penalties under section 6651 or 6656 for a TPSO’s failure to withhold and pay backup withholding tax during the calendar year.

TPSOs that have performed backup withholding for a payee during calendar-year 2024 must file a Form 945, Annual Return of Withheld Federal Income Tax, and a Form 1099-K with the IRS and provide a copy to the payee, according to the IRS.

For calendar-year 2025 and after, the IRS will assert penalties under section 6651 or 6656 for a TPSO’s failure to withhold and pay backup withholding tax.

Notice 2024-85 specifically states:

Calendar year 2024 will be regarded as a further transition period for purposes of IRS enforcement and administration of the information reporting requirements under section 6050W(e), as amended by the ARP [American Rescue Plan]. For calendar year 2024, a TPSO is not required to report payments in settlement of third party network transactions with respect to a participating payee unless the gross amount of aggregate payments to be reported exceeds $5,000, regardless of the number of such transactions. The IRS will not assert penalties under section 6721 or section 6722 for a TPSO for failing to file or failing to furnish Forms 1099-K with respect to a payee unless the gross amount of aggregate payments to be reported exceeds $5,000, regardless of the number of such transactions.

In addition, calendar year 2025 will be regarded as the final transition period for purposes of IRS enforcement and administration of the information reporting requirements under section 6050W(e). For calendar year 2025, a TPSO is not required to report payments in settlement of third party network transactions with respect to a participating payee unless the gross amount of aggregate payments to be reported exceeds $2,500, regardless of the number of such transactions. The IRS will not assert penalties under section 6721 or section 6722 for a TPSO for failing to file or failing to furnish Forms 1099-K with respect to a payee unless the gross amount of aggregate payments to be reported exceeds $2,500, regardless of the number of such transactions.

For Forms 1099-K for calendar years beginning after December 31, 2025, a TPSO is required to report payments in settlement of third party network transactions with respect to any participating payee that exceed a minimum threshold of $600 in aggregate payments, regardless of the number of such transactions.

The IRS will not regard calendar year 2024 or 2025 as a transition period with respect to the requirements of section 6050W that were not modified by section 9674(a) of the ARP, such as provisions relating to payment card transactions.

“The transition period described in this notice is intended to facilitate an orderly transition for TPSO compliance with section 6050W(e) and participating payee compliance with income tax reporting,” the IRS says in the notice.