IRS Transition Relief: Updated Form 1099-K Threshold to $5000 for 2024 Tax Year
The IRS has issued an important transition relief for third-party settlement organizations (TPSOs), such as payment apps and online marketplaces, through Notice 2024-85 under section 6050W(e) of the Internal Revenue Code by the American Rescue Plan Act of 2021 (ARP). This notice outlines new thresholds for reporting transactions on Form 1099-K for calendar years 2024 through 2026 and provides additional guidance on backup withholding requirements.
Let’s dive into the details and understand how this affects TPSOs and their payees.
Revised Reporting Thresholds for Form 1099-K
The IRS has introduced a phased approach to adjust the reporting threshold for transactions facilitated by TPSOs.
- 2024 Transition Period
- TPSOs must report only if aggregate payments to your payee exceed $5,000, regardless of the number of transactions.
- Failure to file or furnish Form 1099-K will not result in penalties under Sections 6721 and 6722 unless this threshold is exceeded.
- 2025 Transition Period
- TPSOs must report only if aggregate payments to your payee exceed $2,500, regardless of the number of transactions.
- Penalties for failing to file or furnish Form 1099-K will apply only if this threshold is exceeded.
- 2026 and Beyond
- The revised threshold of $600, regardless of transaction count, will fully apply starting in the calendar year 2026.
Backup Withholding Relief and Filing Requirements for TPSOs
The IRS has also introduced critical updates regarding backup withholding requirements for TPSOs for the 2024 tax year in Notice 2024-85. In this notice, the IRS announced that penalties under sections 6651 (failure to file) or 6656 (failure to deposit taxes) will not apply to you who fail to withhold and pay backup withholding tax for the 2024 tax year. This relief is intended to ease the administrative burden so that you can adapt to new compliance and reporting requirements.
Filing Requirements for Backup Withholding in 2024
Even with penalty relief in place, TPSOs that perform backup withholding during 2024 must comply with the following filing requirements.
- File Form 945: Report the withheld amounts as part of the annual return for withheld federal income tax.
- File Form 1099-K with the IRS and provide the recipient copy to the payee.
This filing ensures proper documentation of withheld amounts, even as penalty relief is granted for non-compliance in 2024.
Enforcement from 2025 Onward
Starting in calendar year 2025, the IRS will enforce penalties under sections 6651 or 6656 for:
- Failure to withhold backup withholding taxes when required.
- Failure to deposit withheld taxes or file necessary forms on time.
This underscores the importance of TPSOs ensuring compliance with all backup withholding requirements beginning in 2025.
Now What? Next Steps for TPSOs
The updated 1099-K thresholds and backup withholding relief highlight the IRS’s effort to provide a gradual transition for TPSOs while ensuring accurate reporting. These changes underscore the need for you to adapt their processes promptly to comply with evolving tax regulations. By leveraging this transition period, you can refine your systems and ensure a smooth shift toward full compliance by 2026.
Regardless of the threshold, TaxBandits is committed to simplifying the e-filing process for 1099-K forms for the 2024 tax year. For software providers and bulk filers, TaxBandits offers the opportunity to facilitate seamless automation of 1099-K filings through TaxBandits API.
Get started today by e-filing Form 1099-K in minutes and distributing recipient copies by postal mail or online.
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