Concerns over taxpayer confusion prompt IRS to delay implementation of reporting requirements for businesses using payment apps and online marketplaces.
The Internal Revenue Service (IRS) has announced its decision to postpone the implementation of a rule change that would impact tax filers who receive business income through payment apps and online marketplaces. This delay marks the second consecutive year that the IRS has pushed back the enforcement of this change, which could have resulted in an additional 44 million 1099-K forms being sent to small business owners, freelancers, gig workers, and individuals with side hustles. The IRS cited concerns over potential taxpayer confusion and the need to facilitate compliance as the reasons behind the postponement.
Current Reporting Rule for 2023 Taxes
For the current tax year, the existing reporting rule continues to apply. Third-party payment platforms, also known as third-party settlement organizations, are required to report the gross business income of tax filers to both the individuals and the IRS in January. However, this reporting obligation only applies if the filer conducted over 200 business transactions on the platform and earned more than a total of $20,000 from those transactions. It is important to note that personal transactions, such as receiving payment from a friend for their share of dinner or sending money to a child for expenses, are not considered business transactions.
Rule Change for 2024 Taxes
Under the American Rescue Plan of 2021, a rule change was enacted that will eventually require third-party platforms to issue a 1099-K form to tax filers if they earn more than $600 in annual business income over one or more business transactions. However, the IRS has recently announced that for tax year 2024, it will “phase-in” the change and only require third-party platforms to issue a 1099-K if the filer’s business transactions exceed $5,000. This phased-in approach allows the agency to review its operational processes and address taxpayer and stakeholder concerns effectively.
Coalition for 1099-K Tax Fairness Advocates for Congressional Action
The Coalition for 1099-K Tax Fairness, which includes members such as Airbnb, PayPal, Etsy, and others, has welcomed the delay in implementation. The coalition believes that this delay provides an opportunity for lawmakers to develop a permanent, bipartisan solution to the rule change. Members of Congress from both sides of the aisle, including Senator Sherrod Brown (D-Ohio) and Senator Bill Cassidy (R-Louisiana), have expressed support for a higher income threshold to be used. The coalition sees the delay as a victory for common-sense tax policy and believes it will prevent an overwhelming influx of 1099-K forms in January.
Unchanged Tax Obligations Regardless of Delay or Rule Change
It is important to note that neither the delay in implementing the rule change nor its eventual enforcement will alter the tax burden for individuals. Taxpayers have always been responsible for reporting the income they generate from their business activities to the IRS. The difference with the rule change is that the IRS will receive information about business income from third-party payment platforms, making it more challenging for individuals to underreport their earnings and evade taxes. This change will also shed light on the extent of business income generated through these platforms.
The IRS’s decision to postpone the implementation of a rule change affecting tax filers who receive business income through payment apps and online marketplaces has been met with mixed reactions. While some applaud the delay, viewing it as an opportunity for lawmakers to address concerns and find a permanent solution, others continue to advocate for a higher income threshold. Regardless of the delay or the eventual rule change, taxpayers’ obligations to report business income to the IRS remain the same. The change will simply provide the IRS with additional information from third-party platforms, ensuring greater transparency and compliance.