IRS announces delay in Form 1099-K reporting threshold for 2023

In detail

Section 6050W

Section 6050W requires payment settlement entities to file Form 1099-K for each calendar year with respect to payments made in settlement of two types of reportable payment transactions: (1) payment card transactions and (2) third-party network transactions. A third-party network transaction is any transaction settled by a TPSO on behalf of sellers of goods or services that have agreed to have their transactions settled through a third-party payment network.

A third-party payment network is any agreement or arrangement that (1) involves the establishment of accounts with a central organization by a substantial number of providers of goods and services who are unrelated to the central organization and who have agreed to settle transactions for the provision of goods and services with purchasers according to the terms of the agreements, (2) provides standards and mechanisms for setting such transactions, and (3) guarantees payments to the providers of goods and services in settlement of transactions with the purchasers.

A TPSO is the payment settlement entity that must report third-party network transactions. It is the central organization that has the contractual obligation to make payment to the participating payees of the third-party network transactions. A participating payee, in the case of a third-party network transaction, is any person who accepts payment from a TPSO in settlement of such transaction.

Observation: TPSOs typically include online marketplaces, internet payment service providers, service platforms that permit consumers to connect with providers of ride sharing, delivery services, and accommodations, among others.

Notice 2023-74

Notice 2023-74 provides that, for calendar year 2023, a TPSO is not required to report payments in settlement of third-party network transactions with respect to a participating payee unless (1) the gross amount of aggregate payments to be reported exceeds $20,000 and (2) the number of such transactions with that participating payee exceeds 200.

Observation: The continued delay with respect to the $600 Section 6050W reporting threshold amount was in response to significant pushback from taxpayers, tax professionals, and payment processors.

The notice also provides that, for calendar year 2023, the IRS will not assess penalties for a TPSO that failed to file or furnish Forms 1099-K with respect to a payee unless the gross amount of aggregate payments to be reported exceeds $20,000 and the number of such transactions with that participating payee exceeds 200.

In addition, the notice provides that the IRS will not regard 2023 as a transition period with respect to the requirements of Section 6050W that were not modified by the Act, such as provisions relating to payment card transactions.

A reportable transaction subject to withholding under Section 3406(a) includes payments made by TPSOs that are required by Section 6050W to be reported on a Form 1099-K. The notice provides that TPSOs that have performed backup withholding under Section 3406(a) for a payee during calendar year 2023 must file a Form 645, Annual Return of Withheld Federal Income Tax, and a Form 1099-K with the IRS and furnish a copy to the payee if the total reportable payments to the payee exceed $600 for the calendar year.

Observation: Observers have noted that the lower reporting threshold could cause taxpayer confusion and might lead to taxpayers reporting amounts reported on Form 1099-K as income when in fact the taxpayer did not earn taxable income. The delay in reporting was granted in part to allow the IRS time to modify Form 1040, U.S. Individual Income Tax Return, to decrease the possibility of taxpayers over-reporting income.