IRS delays new tax reporting threshold to $5,000 for 2024

In the United States, the Internal Revenue Service (IRS) made a significant announcement regarding the tax reporting thresholds for third-party settlement organizations. Initially set to drop to $600 for the 2022 tax year, the IRS decided to delay this change for the second consecutive year, allowing the previous threshold of $20,000 and 200 transactions to remain in effect for tax year 2023. This decision came as a relief for many taxpayers and tax professionals, who were concerned about the implications of the reduced threshold for reporting income from payment services like PayPal and eBay. The new threshold of $5,000 will now be implemented in 2024 as part of a phase-in strategy to introduce the lower reporting requirement mandated by the American Rescue Plan. The IRS’s decision to delay the implementation of the $600 threshold is particularly relevant in the context of increasing scrutiny over income reporting from various digital payment platforms. The Form 1099-K was established in response to a need for more comprehensive reporting of payment transactions that do not necessarily fit within traditional income reporting systems. As a result, any businesses or individuals receiving payments—regardless of the amount—would be obligated to report those payments. The change in reporting thresholds reflects an ongoing evolution in tax regulation aimed at capturing revenue from the growing gig economy and digital transactions. Additionally, the IRS stated it will not impose penalties on third-party settlement organizations for the failure to withhold and pay backup withholding taxes during 2024. However, from 2025 onward, penalties under sections 6651 or 6656 will be enforced, indicating a return to stricter compliance measures. This underscores the IRS's intent to ensure that tax laws keep pace with the rapid changes in payment technology and the diverse ways individuals and businesses earn income. Taxpayers should remain aware that any received payments through these platforms are still subject to taxation, and the responsibility lies with the individual taxpayer to accurately report their income, irrespective of how it is received. The IRS has also emphasized that receiving a Form 1099-K does not change the nature of the income. In light of the IRS’s guidance and FAQs, numerous taxpayers may have questions about how to address their tax reporting responsibilities, especially those who engage in selling items or performing services online or through cash apps. Consequently, comprehensive resources and information available on the IRS's website are essential for taxpayers navigating these evolving reporting obligations.