What Are the Criteria for Reporting Third-Party Transactions?

Third-party transactions involve payments processed by online platforms and payment applications, such as PayPal, Venmo, or Stripe. These entities, known as Payment Settlement Entities (PSEs), facilitate financial exchanges for goods and services. PSEs are subject to specific criteria for reporting these transactions to the Internal Revenue Service (IRS).

Understanding Third-Party Payment Networks

Third-party payment networks, formally recognized as Payment Settlement Entities (PSEs), are organizations that act as intermediaries in payment transactions. These networks facilitate the flow of money between buyers and sellers or service providers and clients. Common examples include digital payment platforms like PayPal, Venmo, Square, and Stripe, online marketplaces such as Etsy and eBay, and gig economy platforms like Uber and DoorDash.

These entities are responsible for processing payments and collecting relevant transaction data. Under federal tax law, PSEs are mandated to report certain transaction information to the IRS when specific conditions are met. This reporting assists the IRS in monitoring income generated from online sales, freelance work, and other digital economic activities.

Reporting Thresholds

The IRS has specific thresholds that trigger a Payment Settlement Entity (PSE) to issue Form 1099-K. For the 2023 tax year, a Form 1099-K was required if gross payments exceeded $20,000 and there were more than 200 transactions within the calendar year. This threshold applies to payments received for goods and services through third-party payment networks.

For the 2024 tax year, reported in 2025, the reporting threshold has been adjusted. A Form 1099-K will be issued if the gross amount of payments for goods and services totals $5,000 or more, regardless of the number of individual transactions. This change is part of a phased approach by the IRS to implement a lower reporting requirement. The threshold is expected to decrease to $2,500 for the 2025 tax year, with a planned reduction to $600 for 2026 and subsequent years.

It is important to understand that even if these reporting thresholds are not met, any income derived from selling goods or providing services remains taxable. All income, regardless of whether it is reported on an information return, must be accurately declared on a tax return. Failure to report taxable income can result in penalties and interest from the IRS.

Covered Transaction Types

Only payments specifically made for goods and services count towards Form 1099-K reporting thresholds. This includes income from selling items online, providing freelance services, or earnings from participation in the gig economy. For instance, revenue from an e-commerce store or payments for consulting work are considered reportable transactions.

Conversely, certain types of transactions are generally not subject to Form 1099-K reporting, even if processed through a third-party payment network. Personal payments, such as sharing the cost of a meal with friends, gifts, or reimbursements for personal expenses, typically fall outside these reporting requirements. These transactions are not considered taxable income.

Many payment platforms offer options to categorize transactions, often allowing users to distinguish between “friends and family” payments and “goods and services” payments. Properly categorizing these transactions within the payment app helps ensure accurate reporting and can prevent the inclusion of non-taxable personal funds on a Form 1099-K. Users should review their transaction settings to align with the nature of their payments.

Handling Form 1099-K

Upon meeting the specified reporting criteria, a Payment Settlement Entity (PSE) will issue Form 1099-K, “Payment Card and Third Party Network Transactions,” by January 31 of the year following the transactions. This form provides a summary of the gross amount of payments received through the platform for goods and services. It typically includes the total gross amount of reportable transactions, the number of such transactions, and sometimes a month-by-month breakdown.

When receiving a Form 1099-K, it is important to remember that the amount reported represents gross payments, not net income. This gross figure does not account for business expenses, product returns, processing fees, or the cost of goods sold. These deductible expenses must be subtracted when calculating actual taxable income.

For individuals operating as sole proprietors or engaged in freelance or gig work, the income reported on Form 1099-K, along with any other business income, should be reported on Schedule C (Form 1040), Profit or Loss from Business. If the Form 1099-K includes payments for personal items sold at a gain, the profit is taxable and should be reported on Form 8949, Sales and Other Dispositions of Capital Assets, which then carries to Schedule D, Capital Gains and Losses. Even if a Form 1099-K is not received, all taxable income must still be reported on the appropriate tax forms.