IRS Delays $600 Threshold: What It Means for Taxpayers

The Internal Revenue Service has again postponed a change to tax reporting rules for people receiving payments through online platforms and payment apps. This delay affects a lower reporting threshold that was scheduled to take effect, providing temporary relief to casual sellers and gig workers. The decision aims to reduce confusion for taxpayers and allow payment processors more time to prepare for the new requirements.

The Original Reporting Rule Change

The reporting adjustment stems from a provision in the American Rescue Plan Act of 2021. This law targeted Form 1099-K, Payment Card and Third Party Network Transactions, a document used by companies like PayPal and Venmo to report payments for goods and services to the IRS. The goal was to increase tax compliance by capturing income from the growing gig economy and online marketplaces.

Historically, these third-party settlement organizations (TPSOs) were only required to issue a Form 1099-K if an individual received over $20,000 and had more than 200 transactions within a calendar year. The new legislation was set to lower this barrier, mandating reporting for anyone who received more than $600 in a year and removing the 200-transaction minimum. This change would have increased the number of taxpayers receiving these forms.

Understanding the IRS Delay

In response to feedback from taxpayers and payment processors, the IRS announced a delay for the new $600 threshold. For tax year 2023, the reporting rules reverted to the previous standard of over $20,000 and more than 200 transactions. This action created a “transition period” to prevent confusion among taxpayers who might receive a 1099-K for the first time.

The delay was an acknowledgment of the complexities involved. Many feared that personal, non-taxable transactions, such as receiving money from a friend for a shared meal or selling a used personal item at a loss, would be mistakenly reported as income. By postponing the implementation, the IRS provided time for individuals and platforms to better understand and prepare for the eventual change.

Future Implementation of the Threshold

The IRS has outlined a phased approach to implementing the lower reporting threshold. For tax year 2024, an interim threshold of $5,000 was established. This means third-party payment organizations were required to issue a Form 1099-K to taxpayers who received payments exceeding $5,000 during that year, without a minimum transaction count.

This gradual reduction is a stepping stone toward the ultimate goal. For the 2025 tax year, the reporting threshold is set at $2,500. The plan is to then lower the threshold to the $600 level for the 2026 tax year and subsequent years. This strategy allows the agency to continue gathering feedback and refining its processes.

Impact on Taxpayer Responsibilities

The delay in the reporting threshold for payment companies does not alter an individual’s tax obligations. The law has always required taxpayers to report all taxable income, regardless of whether they receive a Form 1099-K. This includes earnings from a side business, freelance work, or profits from selling goods online.

A distinction exists between taxable business income and non-taxable personal transactions. Reimbursements from friends, gifts, or selling a personal belonging for less than its original purchase price are generally not considered taxable income and should not be reported as such. The confusion over how these transactions would be categorized by payment processors was a factor in the IRS’s decision to delay the new rule.

To prepare for future changes and ensure accurate tax filing, maintaining good records is important. Taxpayers should keep detailed documentation that differentiates business-related payments from personal ones. This practice allows individuals to accurately report their income and provides the necessary proof to verify the figures on any Form 1099-K they may receive.